Learning About Bankruptcy and Debt Relief Orders
Questions regarding bankruptcy can appear on the CII AF1, AF2 and J03 exams. Don’t be caught out not knowing how to answer questions on this subject. A good start is reading this article, which explains the rules surrounding bankruptcy and Debt Relief Orders.
THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2018/19.
Bankruptcy is a subject often tested in AF1 and AF2 and also J03. Standard questions appear on the following:
- bankrupt’s property that is exempt from passing to the trustee in bankruptcy, such as tools and vehicles necessary for their work and clothes and furniture for basic domestic needs
- what happens to particular investments including pensions, and the family home where there is a spouse and young children
- the order of priority payment; so secured creditors are dealt with first (e.g. if there is a mortgage on a property) with any debts to the spouse/civil partner last.
Before a bankruptcy order is even made, a creditor, or creditors jointly, have to prove that the person is unable to pay their debts. They must prove they are owed at least £5,000 in unsecured debt or a share of debts that add up to £5,000. Individuals can also make themselves bankrupt by making an online bankruptcy application online.
If creditors force someone into bankruptcy, they issue them with a ‘statutory demand’ and they would have to pay the court fees – 21 days after the statutory demand is issued, they can start bankruptcy proceedings.
With a voluntary bankruptcy, the individual petitions the court by submitting bankruptcy forms, and the individual pays the fees.
How much does bankruptcy cost?
Bankruptcy in England costs £680, which covers adjudicator fees and a deposit administration fee.
A lower cost alternative to bankruptcy is a Debt Relief Order or DRO. To apply for a DRO, a person must:
- owe less than £20,000
- be unable to pay their debt
- have under £1,000 of assets
- have £50 or less left over each month after household expenses
- not own a home
- not have been subject to another DRO within the last 6 years
- have lived, had a property or worked in England or Wales in the last 3 years.
The difference in costs between bankruptcy and a DRO is important; to enter a debt relief order costs just £90 mainly because there is no court involvement.
Which debts can be included in a Debt Relief Order?
Debts that can go into a DRO are called qualifying debts and include credit cards, overdrafts and loans, arrears with rent and bills, hire purchase agreements and business debts.
Examples of debt that cannot go in a DRO are student loans, fines relating to criminal activity and child support.Learn about #bankruptcy and Debt Relief Orders - useful reading for those sitting #CII #AF1, AF2 or J03. Click To Tweet
How long does a Debt Relief Order last?
An order usually lasts for 12 months, and during this time, creditors that are named on the DRO cannot do anything to recover their money.
At the end of 12 months, if nothing has changed, the individual is discharged from the debt covered on the DRO.
How long does a Debt Relief Order stay on a person’s credit record?
The DRO stays on the individual’s credit record for 6 years.
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