If you have a debt that has fallen into arrears, a creditor may decide to try and make you bankrupt. (The term bankruptcy applies to residents of England, Wales and Northern Ireland. The process is slightly different for Scottish clients; we have summarised the differences at the bottom of this factsheet).
The creditor will send you a Statutory Demand, which is a formal legal document, requiring you to pay off the outstanding debt either by instalments or a lump sum or to secure it against a property.
What is a Statutory Demand?
- It is a legal document that demands you pay the debt in full or come to an agreement with the Creditor
- The debt must be a minimum of £5000
- It shows the creditor is looking to start court proceedings against you to make you bankrupt
If you want to challenge the statutory demand you can apply to the Court to have the statutory demand cancelled – known as Set Aside.
You may apply within 18 days to your local County Court to “set aside” the Statutory Demand under the following circumstances:
- There is a dispute regarding the amount of money owed.
- The sum owed is less than £5,000.
- The demand has been issued in error.
- You have the means of paying the debt.
- There is a counterclaim of more than the money owed.
- You have a legal defence to court action being taken against you, such as the creditor being out of time for taking court action – you may need to get advice to see if you’ve got a legal defence.
Ignoring a Statutory Demand (which is definitely not advisable) will allow the creditor to present a petition for bankruptcy against you 21 days after the date of the Statutory Demand.
In particular, a Statutory Demand issued by the VAT (HM Customs & Excise) or the HMRC should be given immediate attention as it’s generally accepted that they are more likely to follow through on a Statutory Demand than any other creditor.
How do I Set Aside a Statutory Demand?
- Apply to the Court named on the Statutory Demand.
- Complete court Form IAA (application to Set Aside), which can be downloaded from the gov.uk website. Whilst the court considers your application, the creditor cannot make you bankrupt.
- A date will be set for a hearing which you must attend.
- If the application is dismissed the creditor can proceed to apply to make you bankrupt.
- If the application is successful, the Statutory Demand will be cancelled or set aside. You would need to continue negotiating with the creditor, dependent on the reason it was set aside, otherwise the creditor could try again to make you bankrupt.
What alternatives do I have to being made bankrupt?
- Pay the debt in full – this would be the easiest way to deal with the Statutory Demand, but is often not an option.
- Offer to pay by instalments – check if the creditor would accept monthly instalments as this would possibly offer the most affordable way to deal with the debt.
- Will the creditor agree to write the debt off? If you have no income, no assets, suffer from severe health problems and no other way of being able to pay the debt off, you could write and ask the creditor if they would write off the debt.
- Reduce the debt to below £5000, as this is the minimum debt level for a creditor to pursue for bankruptcy.
- Look at alternative insolvency debt solutions where applicable, such an Individual Voluntary Arrangement (IVA). You can find out more about this debt solution at www.payplan.com/iva
- If you own your own property, you could consider securing the debt against the property by way of a Voluntary Charge, but you will need to seek specialist advice about this before you consider if it is an option for you.
Information for Scottish clients:
- The term used here is Sequestrated instead of bankrupt
- The debt must be a minimum of £3,000
- You must make payment, find security for or confirm you deny the debt in writing, within 21 days
- The form issued is not a ‘Statutory Demand’, but a ‘Form 5’ which is issued by the creditor to whom you owe money and is served by a Sheriff Officer
- Instead of a ‘Set Aside’, you can fill in the denial slip on the Form 5 if you don’t believe you owe the money – and return to the creditor within 21 days
- Alternative insolvency solutions include Trust Deeds and Debt Arrangement Schemes (DAS) which would both stop legal action from proceeding.
If you’d like further help, please contact our Advice Team on 0800 917 7819.