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Personal Bankruptcy – what recent changes mean for your clients

According to the Oxford Dictionary bankruptcy means &#39utter failure&#39. But unlike the definition here rules on personal bankruptcy have been given a more positive meaning and are now placed under the new Enterprise Act 2002, which received Royal Assent on November 7 2003 and has come into effect on April 1 2004.

The Enterprise Act 2002 is designed to encourage entrepreneurship and support those who have failed business enterprises with little fault of their own.

The main changes under the Act are to encourage the wary to be more entrepreneurial but at the same time offering more protection to those who may be subject to bankrupts whose actions have been found to be culpable. The main effects of the changes are:

• To reduce the restrictions that the undischarged bankrupt is automatically under, by providing that the majority of bankrupts are automatically discharged after a period of 12 months

• To introduce Bankruptcy Restriction Orders for the bankrupt to protect the public and creditors from those bankrupts who have been found blameworthy. These Orders can place restrictions on bankrupt offenders ranging from two to 15 years.

• To introduce Income Payment Agreement as a substitute for Income Payment Orders which are court based, however, both are for a period of three years and occupy the same conditions.

• To introduce and allow the Official Receiver to act as nominee and supervisor of new fast-track IVAs which have started after the bankruptcy order has been made.

• To put the onus on the Official Receiver if necessary to investigate the reason for the failure of the bankrupt.

• A limitation period of three years will operate in which the trustee will need to realise his/her interest in the main residence of the bankrupt before it reverts back to the bankrupt.

How do the changes effect you?

The bankrupt:

The Act will take out the stigma of being a failed entrepreneur and allow those who have failed honestly a further chance and assist companies with financial problems not to go under unduly.

The consumer:

The Act offers added protection for consumers against bankrupts whose conduct during and after the bankruptcy is found to be culpable. It also helps eliminate traders who do not meet their legal obligations.

The lender:

Significant concerns have not been reported by the Council of Mortgage Lenders with the implication of the new Act and the recovering of mortgage arrears.

However, sub-prime lenders may look towards producing more specialist products to assist possible future customers who may be effected by these changes.

The mortgage intermediary:

The changes in the Act could concern the mortgage intermediary in both being subject to themselves to bankruptcy and to acting for clients who are bankrupt.

The new rules will allow intermediaries to refinance their clients after a period of 12 months of the bankruptcy, subject to their client not being judged culpable. This would however, still be subject to the trustee realising the principle resident within the three-year period, which would be the lenders security in any secured financing.

The Enterprise Act is welcome news for business, consumers and the economy in general. It will open markets, increase competition and improve consumer protection. It will encourage entrepreneurs who have failed honestly in the past to brush off the stigma attached to bankruptcy and to move forward in a new wave of confidence, at the same time aiding consumers and small business more protection.

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