Mortgage News

Beating Bankruptcy 29/04/06

This article was first published in Mortgage Introducer.

Wayne Smethurst examines the challenges facing today’s growing number of people facing bankruptcy and how they can begin their journey back to prime borrowing.

In my previous article, I looked at some of the issues of being made bankrupt. I described the two different types of bankruptcy – debtor and creditor. I explained how all the debts become due on the date of the bankruptcy order and how all the bankrupt’s assets, including their bank accounts, are frozen. And, in particular, I talked about the charges and fees that a bankrupt is saddled with as the trustee in bankruptcy pursues a resolution.

It is worth reminding ourselves of these costs. Firstly, the government levies an ad valorem tax on all the proceeds from the asset sales – a tax of 17 per cent. Next, there is no cap on the fees the insolvency practitioner can charge and these fees are typically around the 20 per cent mark, plus VAT naturally. The practitioner also takes a fee of 10 per cent on any disbursements. The official receiver gets a fee, although at £1,625 it seems reasonable compared with everything else that is happening. And, of course, there are the costs associated with selling the bankrupt’s home – estate agency commission, legal fees and so on.

All-in-all, as fees are piled upon fees, the bankrupt’s indebtedness doubles – in some cases more than doubles. Now, it has to be acknowledged that a person who has got into serious financial difficulties may see the option of declaring themselves bankrupt – a debtor bankruptcy – as a way out. He could be discharged after only a year and although the bankruptcy will remain on the record for six years, at least there is a faint light at the end of the tunnel.

Punishment

But what of the creditor bankrupt, especially the home-owning creditor bankrupt with enough equity to pay off the creditor who has forced the issue? While a creditor bankrupt may have played at brinksmanship and lost, they are now going to be punished mercilessly for ending up in the bankruptcy court. They seem to have no choice but to submit to the bankruptcy process, suffer all the costs and probably lose their home as well.

Probably lose their home? Almost certainly, more like. The issue here is that the insolvency practitioner, who is acting as the trustee in bankruptcy, has first call on the bankrupt individual’s equity in the property. But, in order to realise that first call, the trustee must achieve a sale of the home within three years of the bankruptcy order, otherwise the trustee’s share in the property re-invests in the bankrupt individual. This ‘use it or lose it’ rule came in with the Enterprise Act 2002 and it means that action on sales is being taken much more rapidly than it used to be.

It is therefore imperative that a home-owning creditor bankrupt moves quickly, because there is a route open to this type of bankrupt – annulment. But annulment is not easy to achieve without professional help so a service has been set up by specialist company, the Bankruptcy Protection Fund (BPF), to provide that help. The service is not for everybody, only home-owning creditor bankrupts with sufficient equity to pay off their unsecured debts.

Financial Engineering

The service works like this. The bankrupt individual contacts BPF with details of the debt involved in the bankruptcy order plus details of all their other unsecured debts. The company also needs to know the value of the home and the mortgage details, at which point they can make an initial assessment as to whether an annulment is feasible.

If it is, the bankrupt’s mortgage broker arranges, via a leading packager, an application for one of the mortgage products designed expressly for the annulment process by a handful of specialist lenders. When assessing the application, the lender ignores the bankruptcy, the remortgage offer being conditional on the bankruptcy being annulled. Having identified all the unsecured debts and bankruptcy costs, BPF arranges bridging finance to redeem the debts, following which a court hearing is arranged to prove that there are no unsecured debts.

If there are no unsecured debts, then the individual is not bankrupt and the court annuls the bankruptcy order. It is as if it had never happened. As soon as the solicitor acting in the remortgage confirms that the bankruptcy has disappeared from the record, then the lender completes the re-mortgage and the bridging finance is repaid.

This may sound long-winded but it all happens reasonably quickly, with start to finish rarely taking more than three months. And there are major benefits here. The individual has not lost their home and has a quicker route back to being a prime lending risk. Furthermore, they have no bankruptcy record and they have achieved this much more quickly and at a far lower cost than with the bankruptcy process.

Overall, this is a smart piece of financial engineering and one where the result really is win-win. Unless, of course, you make your money as a bankruptcy trustee.

Wayne Smethurst is director of Glow Mortgages.

The Impact of Bankruptcy 15/04/06

This article was first published in Mortgage Introducer

Wayne Smethurst tackles the issue of bankruptcy and explores the misery that it can cause individuals.

Much play has been made of the rise in the number of individual insolvencies, whether it’s people being created bankrupt by their creditors or declaring themselves to be bankrupt. In this, the first of two articles, I shall be looking at some of the issues surrounding the impact of being made bankrupt.

But to start, let’s remind ourselves of the data, published each quarter by the Department of Trade and Industry (DTI). This data shows a worrying trend-line.

While Individual Voluntary Arrangements (IVAs) in 2005 rose at a faster rate than bankruptcies, it’s bankruptcies that I particularly want to examine. In the last quarter of 2005, there were 13,501 bankruptcies. This represented an increase of 11 per cent on the third quarter of 2005 and an increase of 38 per cent on the last quarter of 2004. Bankruptcies during the whole of 2005 totalled over 47,000, an increase on 2004 of 31 per cent.

A bankruptcy order is made on the petition of the debtor or one of his creditors when the court is satisfied that there is no prospect of the debt being paid. There are two types of bankruptcy. Debtor bankruptcy is where the individual has declared themselves bankrupt. There are usually few or no assets to cover the debts outstanding and, therefore, in the eyes of the court, no prospect of the debts being paid.

Creditor bankruptcy is where an individual is made bankrupt through the petition of a company to which the individual owes money. In the case of a credit card company, for example, the company has to prove to the court that the money is owed. But in the case of national and local governmental bodies, it is enough to show that the money has been demanded. So for unpaid income tax, National Insurance, value added tax (VAT), or council tax, an individual could find that they are the subject of a bankruptcy order, even when they think that a negotiation is still continuing.

Key Issues

There are two key issues that a bankrupt faces on the day the bankruptcy order is made. Firstly, it is not just the debt in dispute that becomes due, it is all the individual’s debts. So even though the repayments on cards and loans may be up-to-date, the balances are now liable to be repaid in full. Secondly, all the individual’s assets are frozen, including their bank accounts, with the result that the individual cannot access any equity to pay off the debt in dispute and reverse the bankruptcy order.

All bankrupts find the process of bankruptcy an embarrassing, even shattering, experience as their lifestyle is examined in detail, but for the creditor bankrupts it can seem particularly painful, especially if they have enough equity available in their property to cover the debt in dispute. But it gets worse because not only are they now liable to pay off all debts, but costs start to mount as the bankruptcy process unfolds.

Problems Upon Problems

The official receiver takes control of the bankrupt’s assets and arranges a creditors meeting, at which a trustee in bankruptcy is appointed, normally an insolvency practitioner. These are specialists in private practice who are often members of an accountancy firm but who can also be part of a dedicated insolvency practice.

What the official receiver receives in fees is laid down in the rules and at £1,625 doesn’t sound excessive. Unfortunately that’s only the tip of the iceberg. First off, the trustee has to pay all the proceeds from asset sales into an official insolvency service account, and the government takes 17 per cent of that by way of an ad valorem tax. Next, there’s no cap on the fees an insolvency practitioner can charge and fees around the 20 per cent mark are fairly typical. This is plus VAT, of course, so that’s another 17.5 per cent of that 20 per cent. And when it comes to arranging any disbursements, a fee typically of 10 per cent is charged on each disbursement, including, naturally, 10 per cent of the 20 per cent they’re extracting for doing the work, plus the inevitable VAT.

So for the bankrupt individual, problems are piled upon problems, as fees are piled upon fees. The total indebtedness has doubled, in some cases more than doubled, as the bankruptcy fees have risen. Furthermore, the trustee will want to force the home to be sold, because he only has three years under the ‘use it or lose it’ rules in the Enterprise Act 2002 to realise the asset and grab his share, and the sale, of course, attracts estate agent, legal and associated costs – with a forced sale potentially delivering a lower return than the full market value.

The new rules may allow for a bankrupt to be discharged after only one year, but what a year of misery and pain. In my second article “Beating bankruptcy” , I’ll look at how some of that misery and pain can be dissipated.

Wayne Smethurst is director of Glow Mortgages.

Glow Launches ‘Bankruptcy friendly’ Remortgage 07/04/06

Glow Mortgages has launched a bankruptcy annulment remortgage service to combat the growing level of individuals being made bankrupt and forced to remortgage or sell their property.

After its research revealed people’s levels of indebtedness can more than double following formal bankruptcy, Glow Mortgages, in tandem with the Bankruptcy Protection Fund, has launched a scheme to work with a bankrupt homeowner to arrange for all their unsecured debts to be paid off.

When this has been done the court can annul the bankruptcy order, if all unsecured debts are dealt with, striking the individuals bankruptcy off the record. Following this, the individual is able to arrange a remortgage on the basis that by the end of the process the individual will no longer be bankrupt, allowing themselves to get a deal where the original bankruptcy is ignored for mortgage purposes, so that they can start to edge their way back to prime status.

Commenting on the launch, Wayne Smethurst, director of Glow Mortgages, said: “This straightforward and transparent service offers substantial benefits to bankrupts. They don’t have to lose their home, their situation is resolved at a much lower cost, they no longer have the stigma of having been a bankrupt and they have a much quicker route back to being a ‘prime’ credit risk.”

Mike Pendergast, IFA at Zen Financial Services, said the deal made good sense for people who had been classified as bankrupt. He said: “The Glow product looks like a good solution for genuine cases. It depends on lending policy, as we don’t want individuals taking bankruptcy as an easy option as this could affect lending policy generally and could lead to increased borrowing costs, but for genuine cases it seems to fill a gap in the market.”