12: Personal Insolvency: Bankruptcy

Question 1

What is bankruptcy?

Answer 1

Bankruptcy is the principal procedure for dealing with the insolvency of individuals.

Question 2

What happens to the assets of a bankrupt individual?

Answer 2

The assets of a bankrupt individual pass automatically to a trustee in bankruptcy.

Question 3

What is the role of the trustee in bankruptcy?

Answer 3

The trustee’s role is to realise the bankrupt’s assets and distribute them to the bankrupt’s creditors.

Question 4

What is discharge in the context of bankruptcy?

Answer 4

Discharge is the process of releasing an individual from the bankruptcy process.

Question 5

When does discharge typically occur for most bankrupts?

Answer 5

Discharge happens automatically after one year.

Question 5

What happens to the debtor’s slate upon discharge?

Answer 5

The debtor’s slate is normally wiped clean, and they can start again, free of debt.

Question 6

What laws mainly govern bankruptcy?

Answer 6

Bankruptcy is governed mainly by the Insolvency Act 1986 (IA 1986) and the Insolvency Rules 2016.

Question 7

What is the bankruptcy level?

Answer 7

The total amount of debt or debts must be at least the bankruptcy level - owing £5,000 at the moment.

Question 8

What are the two ways to prove that the debtor cannot pay?

Answer 8

1. statutory demand
2. proving that the creditor has tried unsuccessfully to enforce a judgment against the debtor.

Question 9

Who must the creditor serve the creditor’s petition on?

Answer 9

The creditor must serve the petition personally on the debtor at least 14 days before the hearing.

Question 10

Where must the creditor file the petition if it is not submitted online?

Answer 10

It is filed at the debtor’s local County Court.

Question 11

What is a creditor’s petition?

Answer 11

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.

Question 12

Who pays the deposit when submitting a creditor’s petition?

Answer 12

The creditor is required to pay a deposit when they submit their petition, to cover the costs of the Official Receiver.

Question 13

Who decides a debtor’s application for bankruptcy?

Answer 13

An adjudicator decides the debtor’s application.

Question 14

What does being declared bankrupt relieve a debtor from?

Answer 14

Dealing with their creditors.

Question 15

What is one potential disadvantage of bankruptcy for a debtor?

Answer 15

The legal disabilities to which they will be subject.

Question 16

What is a debt relief order?

Answer 16

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.

Question 17

What is the statutory demand?

Answer 17

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.

Question 18

What happens if the statutory demand is payable in the future?

Answer 18

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.

Question 19

What must the creditor do if the debt is payable now?

Answer 19

The creditor must show that the debtor has not paid the debt within 3 weeks.

Question 20

What happens if a debtor applies for a bankruptcy order?

Answer 20

The debtor can apply to be discharged after one year to start again free of debt.

Question 21

What is required for a creditor’s petition to be accepted?

Answer 21

The creditor must show that the debtor is unable to pay their debts, and the debts must meet the bankruptcy level.

Question 22

What can the court do if the creditor unreasonably refuses an offer by the debtor to secure the debt?

Answer 22

The court may decline to make a bankruptcy order if the creditor unreasonably refuses the debtor’s offer.

Question 23

What happens to a debtor’s assets after they are declared bankrupt?

Answer 23

The assets are handled by the trustee in bankruptcy and are distributed to the creditors.

Question 24

What does the trustee in bankruptcy do?

Answer 24

They take control of the bankrupt’s assets, sell them, and distribute the proceeds to the creditors.

Question 25

On what basis is a petition presented?

Answer 25

A petition is presented on the basis of the statutory demand.

Question 26

Who is appointed as the trustee in bankruptcy when a bankruptcy order is made?

Answer 26

The Official Receiver (OR) is appointed as trustee in bankruptcy.

Question 27

Who can replace the Official Receiver as trustee in bankruptcy?

Answer 27

The bankrupt’s creditors can appoint a trustee of their choice to replace the OR. The trustee must be a licensed insolvency practitioner.

Question 28

What can the trustee require the bankrupt to do?

Answer 28

The trustee can require the bankrupt to attend a public examination and answer questions under oath.

Question 29

What happens to all remedies of the bankrupt’s creditors once a bankruptcy order is made?

Answer 29

All remedies of the bankrupt’s creditors in respect of debts owed to them are barred.

Question 30

Who holds the bankrupt’s estate at the time of the order?

Answer 30

The trustee holds the bankrupt’s estate.

Question 31

What are “tools of the trade” in the context of bankruptcy?

Answer 31

Tools of the trade are equipment needed for the bankrupt’s employment or business, defined in s283(2) (a).

Question 32

Can the trustee require the bankrupt to replace tools?

Answer 32

Yes, if the cost of replacing the tools with cheaper equivalents would be less than their worth.

Question 33

What household items can a bankrupt keep?

Answer 33

Clothing, bedding, furniture, household equipment, and provisions necessary to meet the basic domestic needs of the bankrupt and their family (s283(2)(b)).

Question 34

What is the most valuable asset for a bankrupt?

Answer 34

The bankrupt’s home is likely to be the most valuable asset.

Question 35

Can the trustee evict the bankrupt and their family from their home?

Answer 35

The trustee cannot evict the bankrupt and their family without obtaining a court order.

Question 36

What happens to the bankrupt’s home if not sold within three years after the bankruptcy order?

Answer 36

It re-vests in the bankrupt.

Question 37

Is a bankrupt allowed to earn income?

Answer 37

Yes, a bankrupt is allowed to earn income, whether as an employee or from self-employment.

Question 38

Does income earned after bankruptcy form part of the estate?

Answer 38

No, income earned after the bankruptcy order does not form part of the estate that passes to the trustee.

Question 39

What can the trustee ask the court for if the bankrupt’s income exceeds a certain amount?

Answer 39

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.

Question 40

What happens to property acquired by the bankrupt during bankruptcy?

Answer 40

The trustee may serve a notice on the bankrupt to claim the property.

Question 41

How long does the trustee have to serve a notice on after-acquired property?

Answer 41

The trustee must serve the notice no later than 42 days after they became aware of the after-acquired property.

Question 42

What are some legal disabilities a bankrupt faces until discharge?

Answer 42

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.

Question 43

What can a trustee in bankruptcy apply to the court for regarding transactions?

Answer 43

The trustee can apply to the court for an order setting aside transactions at an undervalue (s339) and preferences (s340).

Question 44

What happens if a secured creditor recovers a surplus, e.g. from selling a house?

Answer 44

They must pay the surplus to the trustee.

Question 45

What security can an individual not create?

Answer 45

An individual cannot create a floating charge; only a mortgage or fixed charge is possible.

Question 46

In what order are the proceeds from assets distributed?

Answer 46

(1) Costs of the bankruptcy,
(2) Preferential debts
(3) Ordinary unsecured creditors (rank and abate equally)
(4) Postponed creditors (bankrupt’s spouse)

Question 47

When is a bankrupt typically discharged?

Answer 47

A bankrupt is typically discharged after one year from the date of the bankruptcy order (s279).

Question 48

What debts are exceptions to discharge?

Answer 48

Debts incurred as a result of fraud, breach of trust, liability for personal injury, and student loans.

Question 49

What happens to legal disabilities upon discharge?

Answer 49

Legal disabilities cease to apply unless a bankruptcy restrictions order is made.

Question 50

What remains the duty of a former bankrupt?

Answer 50

They remain under a duty to co-operate with the trustee.

Question 51

When can the trustee postpone discharge?

Answer 51

If the bankrupt fails to comply with their obligations to co-operate.

Question 52

What are bankruptcy restrictions orders (BROs)?

Answer 52

BROs are orders that impose restrictions on culpable bankrupts for between 2 and 15 years.

Question 53

Under what circumstances can a BRO be imposed?

Answer 53

Similar to those for director disqualification under CDDA 1986, such as giving preference, entering into a transaction at an under-value, or wrongful trading.

Question 54

What is the effect of a BRO?

Answer 54

Many legal disabilities that apply to undischarged bankrupts continue to apply.

Question 55

What are bankruptcy restriction undertakings (BRUs)?

Answer 55

BRUs are voluntary undertakings given to avoid the cost of proceedings for a BRO.