Making yourself bankrupt

On the ways to make onself bankrupt.

One of the people who can present a bankruptcy petition is the individual himself (assuming he meets the conditions referred to in section 265 of the Insolvency Act as previously referred to, see Making someone bankrupt part 1:, Making someone bankrupt part 2:). The grounds upon which he or she can do this are those specified in section 272, namely inability to pay debts. The petition has to be accompanied by a statement of the debtor's affairs dealing with particulars of creditors, debts, liabilities and assets and other prescribed information.

The test is inability to pay debts at the time the debts fall due. Therefore the court is not looking at the assets and liabilities, merely liquidity or cashflow. However the court will take a realistic view. The question is whether the person has a real and immediate prospect of being able to meet liabilities in due course. Even some degree of illiquidity does not prevent that. Someone who has plenty of realisable assets, or assets against which borrowings could be relatively easily secured, could be said to be able to pay their debts as they fall due even though they may be struggling to make particular payments. (This is one reason why the petition has to specify liabilities and assets etc: although the test is inability to pay debts, whether there is true inability has to be seen in the entire context).

You may be asking yourself the question, why would someone want to make themselves bankrupt? There can be a number of reasons, some good, some not so good. Becoming bankrupt has, as will be seen in subsequent articles, all sorts of consequences for the individual. Effectively virtually all of their assets go into the bankruptcy, and then the people who are owed money are paid what there is out of the monies left in the estate. (Secured creditors, for example a building society or bank with a mortgage over property, will of course be entitled to realise their security and if the value of the security exceeds the debt they will be paid in full and the balance will be available for creditors generally: if the security is less than the debt then in respect of the balance they will be in the same position as unsecured creditors). In general terms however the effect of the bankruptcy is to wipe the slate clean. There are certain provisions which can require subsequent contribution, but in broad terms it means you put your debts behind you. Of course, it also means you put your assets behind you, but sometimes it can be easier to make a fresh start.

Take an example. Someone has got themselves into debt. Their assets are not really worth that much. However what they do is battle on, constantly in financial difficulty, perhaps working extra overtime and taking weekend jobs to try and keep up the payments. In ancient Rome people and their families could be sold into slavery if they could not pay their debts, with the proceeds of sale going to the creditors. Thankfully we no longer have that, but sometimes people in financial difficulties can effectively be in something like a mild form of "slavery" (I use the term in inverted commas because of course even the hapless plight of somebody whose entire life is spent working to pay debts owed to others still is not in the same dreadful position as someone who in fact suffered the horror of slavery) because their lives are not their own. Trying to pay the debts could mean that they spend years of their lives battling with financial difficulty, when it would be easier to wipe the slate clean and start all over again. Therefore there can be very good reasons why someone would just decide that the best and most sensible course would be to go bankrupt.

Of course sometimes people make themselves bankrupt for less creditable reasons. They may think that it could prevent claims in a divorce from a spouse, or the spouse enforcing those claims after the divorce. They may feel that they will get backing to acquire assets through nominees on the basis that they are the only ones who can actually make them worth anything. Sometimes people will do it where they have "hidden" assets and are trying to put creditors off the scent. Needless to say hiding assets on bankruptcy is illegal, and if they become bankrupt then all the assets (whether hidden or not) fall into the bankruptcy. That does not mean of course that some people will not try to hide them, nor that some will not succeed.