How Expensive Is Personal Bankruptcy? The £6,000 Loss A Zeptosecond Later And How To Avoid It.

Overview Of How Expensive Is Personal Bankruptcy

How expensive is personal bankruptcy and how can you possibly lose £6,000 in a zeptosecond? 

If you go personally bankrupt then either you as the bankrupt or the bankruptcy estate immediately loses £6,000. How is this possible?

Why Is Bankruptcy So Expensive?

When a person goes bankrupt the making of the bankruptcy order triggers the General Fee of the Official Receiver of £6,000 (“the General Fee”) because of Schedule 1 of the Insolvency Proceedings (Fees) Order 2016. If the bankruptcy arises following a creditors petition then there is another Official Receiver fee of £2,775 that sprouts.

It is speculated that such fees stem from a desire to make the Insolvency Service self-sufficient and less reliant on funding from the Treasury.

The Insolvency Service’s Annual Report for 2022 to 2023 presented to Parliament as one of its Shape, Sharpen or Strengthen objectives was to:

Sharpen our financial model to ensure sustainability

This report went onto say:

We have delivered annual cashable benefits this year through the implementation of the increase to company and creditor deposit fees…

Bankruptcy Costs

Ultimately if you go bankrupt either you or your bankruptcy estate will contribute to the Insolvency Service. The General Fee of £6,000 will be lost to creditors as a cost of bankruptcy except if the case has a surplus of assets over debts (a relatively rare event).

Leaving aside the fees of the Official Receiver, if a private Trustee in Bankruptcy is appointed then all their fees need to be paid as well as any agents they instruct as part of the costs and expenses of bankruptcy. They can be very substantial potentially running sometimes into tens of thousands of pounds (or more) if a Trustee in Bankruptcy is appointed to deal with the bankruptcy estate and bankrupt’s assets.

Even if a creditor replaces the Official Receiver with an Insolvency Practitioner those fees must be paid usually before anything else subject to the finer points of the statutory order of payment in insolvency proceedings. 

If the bankrupt looks to obtain an annulment of bankruptcy those fees must still be paid.

Does The Bankrupt Pay These Costs?

Whether or not it is the bankrupt or their creditors that pay these costs depends. A bankrupt does not just lose their house (if there is one), it is not as simple as that. It never is.

A person with no material assets and limited disposable income will potentially not lose a great deal if anything.

However, on the other hand, a person with assets and income can lose most of that. 

One thing is for sure if an individual is asset-rich but cash-poor, bankruptcy can be a most unfortunate tale as a legal mechanism under the Insolvency Act 1986 to have their assets hoovered up and redistributed to creditors. 

How To Avoid The Costs Of Bankruptcy

Avoiding the costs of bankruptcy is particularly an issue if an individual has assets comfortably exceeding their debts whereby they can anticipate a return of the surplus back to them. Plainly in such an instance, they have lost from their pool of assets the costs and expenses of bankruptcy. 

It would appear to demonstrate bankruptcy as a jolly expensive way of realising the assets to pay off creditors. If possible the likelihood is that it would be far cheaper and far more financially efficient, for an individual, before bankruptcy becomes a realistic possibility to turn all their assets into cash (including their home if required) and then use whatever residual funds they have to restart their financial life.