12: Personal Insolvency: Bankruptcy Flashcards
What is bankruptcy?
Bankruptcy is the principal procedure for dealing with the insolvency of individuals.
What happens to the assets of a bankrupt individual?
The assets of a bankrupt individual pass automatically to a trustee in bankruptcy.
What is the role of the trustee in bankruptcy?
The trustee’s role is to realise the bankrupt’s assets and distribute them to the bankrupt’s creditors.
What is discharge in the context of bankruptcy?
Discharge is the process of releasing an individual from the bankruptcy process.
When does discharge typically occur for most bankrupts?
Discharge happens automatically after one year.
What happens to the debtor’s slate upon discharge?
The debtor’s slate is normally wiped clean, and they can start again, free of debt.
What laws mainly govern bankruptcy?
Bankruptcy is governed mainly by the Insolvency Act 1986 (IA 1986) and the Insolvency Rules 2016.
What is the bankruptcy level?
The total amount of debt or debts must be at least the bankruptcy level - owing £5,000 at the moment.
What are the two ways to prove that the debtor cannot pay?
- statutory demand
- proving that the creditor has tried unsuccessfully to enforce a judgment against the debtor.
Who must the creditor serve the creditor’s petition on?
The creditor must serve the petition personally on the debtor at least 14 days before the hearing.
Where must the creditor file the petition if it is not submitted online?
It is filed at the debtor’s local County Court.
What is a creditor’s petition?
A creditor’s petition is a request submitted by a creditor to the court to declare a debtor bankrupt because they are unable to pay their debts.
Who pays the deposit when submitting a creditor’s petition?
The creditor is required to pay a deposit when they submit their petition, to cover the costs of the Official Receiver.
Who decides a debtor’s application for bankruptcy?
An adjudicator decides the debtor’s application.
What does being declared bankrupt relieve a debtor from?
Dealing with their creditors.
What is one potential disadvantage of bankruptcy for a debtor?
The legal disabilities to which they will be subject.
What is a debt relief order?
It is an order that freezes debts for a year, after which they are written off if the individual’s financial situation hasn’t improved.
What is the statutory demand?
A statutory demand is a formal request for payment of a debt, which can be used as a basis for a bankruptcy petition if not satisfied within 21 days.
What happens if the statutory demand is payable in the future?
The debtor must demonstrate to the creditor’s satisfaction that there is a reasonable prospect that they will be able to pay the debt when it falls due.
What must the creditor do if the debt is payable now?
The creditor must show that the debtor has not paid the debt within 3 weeks.
What happens if a debtor applies for a bankruptcy order?
The debtor can apply to be discharged after one year to start again free of debt.
What is required for a creditor’s petition to be accepted?
The creditor must show that the debtor is unable to pay their debts, and the debts must meet the bankruptcy level.
What can the court do if the creditor unreasonably refuses an offer by the debtor to secure the debt?
The court may decline to make a bankruptcy order if the creditor unreasonably refuses the debtor’s offer.
What happens to a debtor’s assets after they are declared bankrupt?
The assets are handled by the trustee in bankruptcy and are distributed to the creditors.
What does the trustee in bankruptcy do?
They take control of the bankrupt’s assets, sell them, and distribute the proceeds to the creditors.
On what basis is a petition presented?
A petition is presented on the basis of the statutory demand.
Who is appointed as the trustee in bankruptcy when a bankruptcy order is made?
The Official Receiver (OR) is appointed as trustee in bankruptcy.
Who can replace the Official Receiver as trustee in bankruptcy?
The bankrupt’s creditors can appoint a trustee of their choice to replace the OR. The trustee must be a licensed insolvency practitioner.
What can the trustee require the bankrupt to do?
The trustee can require the bankrupt to attend a public examination and answer questions under oath.
What happens to all remedies of the bankrupt’s creditors once a bankruptcy order is made?
All remedies of the bankrupt’s creditors in respect of debts owed to them are barred.
Who holds the bankrupt’s estate at the time of the order?
The trustee holds the bankrupt’s estate.
What are “tools of the trade” in the context of bankruptcy?
Tools of the trade are equipment needed for the bankrupt’s employment or business, defined in s283(2) (a).
Can the trustee require the bankrupt to replace tools?
Yes, if the cost of replacing the tools with cheaper equivalents would be less than their worth.
What household items can a bankrupt keep?
Clothing, bedding, furniture, household equipment, and provisions necessary to meet the basic domestic needs of the bankrupt and their family (s283(2)(b)).
What is the most valuable asset for a bankrupt?
The bankrupt’s home is likely to be the most valuable asset.
Can the trustee evict the bankrupt and their family from their home?
The trustee cannot evict the bankrupt and their family without obtaining a court order.
What happens to the bankrupt’s home if not sold within three years after the bankruptcy order?
It re-vests in the bankrupt.
Is a bankrupt allowed to earn income?
Yes, a bankrupt is allowed to earn income, whether as an employee or from self-employment.
Does income earned after bankruptcy form part of the estate?
No, income earned after the bankruptcy order does not form part of the estate that passes to the trustee.
What can the trustee ask the court for if the bankrupt’s income exceeds a certain amount?
An income payments order if the bankrupt’s income is more than necessary for meeting the reasonable domestic needs of the bankrupt and their family.
What happens to property acquired by the bankrupt during bankruptcy?
The trustee may serve a notice on the bankrupt to claim the property.
How long does the trustee have to serve a notice on after-acquired property?
The trustee must serve the notice no later than 42 days after they became aware of the after-acquired property.
What are some legal disabilities a bankrupt faces until discharge?
A bankrupt cannot act as a director of a company,
obtain credit for more than £500 without disclosing bankruptcy,
trade under a different name,
or practice as a solicitor without permission from the Solicitors Regulation Authority.
What can a trustee in bankruptcy apply to the court for regarding transactions?
The trustee can apply to the court for an order setting aside transactions at an undervalue (s339) and preferences (s340).
What happens if a secured creditor recovers a surplus, e.g. from selling a house?
They must pay the surplus to the trustee.
What security can an individual not create?
An individual cannot create a floating charge; only a mortgage or fixed charge is possible.
In what order are the proceeds from assets distributed?
(1) Costs of the bankruptcy,
(2) Preferential debts
(3) Ordinary unsecured creditors (rank and abate equally)
(4) Postponed creditors (bankrupt’s spouse)
When is a bankrupt typically discharged?
A bankrupt is typically discharged after one year from the date of the bankruptcy order (s279).
What debts are exceptions to discharge?
Debts incurred as a result of fraud, breach of trust, liability for personal injury, and student loans.
What happens to legal disabilities upon discharge?
Legal disabilities cease to apply unless a bankruptcy restrictions order is made.
What remains the duty of a former bankrupt?
They remain under a duty to co-operate with the trustee.
When can the trustee postpone discharge?
If the bankrupt fails to comply with their obligations to co-operate.
What are bankruptcy restrictions orders (BROs)?
BROs are orders that impose restrictions on culpable bankrupts for between 2 and 15 years.
Under what circumstances can a BRO be imposed?
Similar to those for director disqualification under CDDA 1986, such as giving preference, entering into a transaction at an under-value, or wrongful trading.
What is the effect of a BRO?
Many legal disabilities that apply to undischarged bankrupts continue to apply.
What are bankruptcy restriction undertakings (BRUs)?
BRUs are voluntary undertakings given to avoid the cost of proceedings for a BRO.
