Pick yourself up, dust yourself off and …

Personal insolvency has increased by about 90% since the 1960s but only 7%-12% of bankrupts are culpable, according to government calculations in the white paper preceding the 2002 Enterprise Act 2002. The personal insolvency provisions of the act, which come into force on 1 April this year, aim to offer a fresh start to the others, those who have failed through no fault of their own.

Under the old law most first-time bankrupts were automatically discharged from bankruptcy after three years, or five years if bankrupt within the previous 15 years.

Under the new law, regardless of any previous bankruptcies, most bankrupts will be discharged after one year. If a bankruptcy is uncomplicated and has been fully investigated, the official receiver can reduce this period if unopposed by creditors. This has the potential to bring us in line with the USA, where bankruptcies can last for only three or four months.

Bankruptcy restriction orders
Under the new law, on the application of either a trustee in bankruptcy or the official receiver, the court can also extend the period of a bankruptcy for between two and 15 years by means of a bankruptcy restriction order, if the bankrupt has:

• failed to keep records or produce information
  
• entered into a transaction at an undervalue (a gift by the bankrupt or a transaction where the consideration or value received by the bankrupt is less than the value of what they give) or given a preference (where a bankrupt has preferred one or more creditors over others by making a priority of payments to them)
  
• incurred a debt that they had no reasonable expectation of being able to pay
  
• neglected business affairs so the extent of the bankruptcy is affected.

A bankruptcy restriction undertaking is volunteered by the bankrupt without a court order and has the same effect as a bankruptcy restriction order.

It is an offence for a bankrupt subject to either an order or an undertaking to act as a director of a company, to be involved in any way with the promotion, formation or management of a company without the leave of the court, or to act as a receiver or manager of company property.

Implications for the family home
It is likely that the bankrupt person's principal domestic residence, often the matrimonial home, will be the most valuable asset in the bankruptcy. It is also likely to be subject to the competing interests of the creditors and the bankrupt person's family.

Under the old law it was possible for a trustee in bankruptcy to delay the sale of the matrimonial home for a number of years.

Although the old system was unfair to the bankrupt and their family, the new one may go too far the other way

This could mean that even some years after a bankrupt had been discharged, a trustee could seek to sell the matrimonial home, cashing in on the value of market increases and home improvements.

To remedy this perceived injustice, the new law introduces a re-vesting mechanism for the matrimonial home, which has been dubbed the "sunset provision". It means a bankrupt's interest in their principal residence automatically ceases to form part of their estate three years after the date of the bankruptcy. Unless a trustee takes steps to realise the bankrupt's interest in the matrimonial home within three years of the date of bankruptcy, they lose the right to do so.

To apply for a possession or charging order during this period would prevent the re-vesting provisions applying, unless the equity in the matrimonial home were less than £1000. Where the equity in the matrimonial home is less than £1000, the trustee cannot realise it as an asset.

Although the old system was unfair to the bankrupt and their family, it is thought that the new one may go too far the other way.

If the value of the matrimonial home rises to more than £1000 after a period of three years from the date of the bankruptcy, as it may do if house prices rise sharply after a slump in which negative equity has affected the matrimonial home, the bankrupt will get a windfall and the creditors will lose out.

Fast-track voluntary arrangements
Individual voluntary arrangements, or IVAs, have been around since 1985. They are seen as an effective way of debtors satisfying their debts while binding their creditors by contract without the costs and restrictions of bankruptcy. The new law introduces a fast-track IVA procedure, so-called because it is controlled by the official receiver and involves only limited recourse to the court.

The fast-track IVA is only available to undischarged bankrupts. Their proposals for paying their creditors are processed by the official receiver before being approved by creditors. If creditors agree the proposals, the official receiver notifies the court and the IVA becomes binding.