6 - Bankruptcy

Question 1

High level description of bankruptcy

Answer 1

When a person cannot pay their debts,

their assets are taken and shared amongst creditors.

Question 2

What are the restrictions on somebody who is declared bankrupt?

Answer 2

• Property transferred to the trustee in bankruptcy;
• Can’t retain more assets than necessary for use in trade and basic family needs;
• Must dislose all assets/debts;
• Can’t hide assets;
• Can’t dispose assets with intent to defraud creditors;
• Can’t leave the country with property;
• Can’t destroy records;
• Can’t falsify records;
• Can’t act as a director, or insolvency practitioner;
• Can’t obtain credit without disclosing bankruptcy.

Question 3

Bankruptcy

How is the bankruptcy procedure started?

Requirements to be assessed as bankrupt.

Answer 3

Can be initiated by the subject, but usually by creditors.

Creditors must petition the court - they must be owed £5k (either individually or as a collective) of unsecured debt.

Creditors have to prove the person is unable to pay, has not complied with a statutory demand within 3 weeks OR has a CCJ.

Question 4

Bankruptcy

How is the bankruptcy petition made (in practical terms)?

Answer 4

Before 5/4/16 all bankruptcy applications had to be submitted to court.

Now they are sent in through an online portal and an Adjudicator makes the decision regarding the application (rather than the court).

Question 5

Bankruptcy

Process once bankruptcy is confirmed

Answer 5

An Official Receiver (OR) who is an officer of the court takes control of most of the persons assets.

A trustee (Trustee in Bankruptcy) is appointed who realises the value of the assets and distributes to the creditors.

Question 6

Bankruptcy

How is the Trustee in Bankruptcy selected?

Answer 6

The OR investigates the situation and sends a report to creditors, and decides whether to call a creditors meeting to vote for an insolvency practitioner as the TIB.

If there is no meeting then the OR becomes the TIB and performs both roles.

Question 7

Bankruptcy

What assets are protected in bankruptcy?

Answer 7

• Tools of trade;
• Books;
• Vehicles necessary for employment, business or vocation;
• Bedding, clothing, furniture, household equipment;
• Property the bankrupt holds on trust for somebody else.

Question 8

Bankruptcy

How is the bankrupts future income treated?

Answer 8

The TIB can ask the bankrupt to sign an IPA (income payment agreement) or apply to court for an IPO (income payment order).

Both result in the bankrupt contributing from their income towards repaying their debts.

Question 9

Bankruptcy

What happens to bankrupts home?

Time restrictions and limits.

Answer 9

If they own their own home, their interest and right to sell it passes to the TIB.

The TIB obtains an order for sale.

If minor children are involved there must be a 1 year delay.

The TIB has 3 years to deal with the home otherwise it reverts to the bankrupt.

Question 10

Bankrupt

How can the TIB prevent the home reverting to the bankrupt after the 3 years?

Answer 10

• Realising the interest (i.e. selling the home);
• Applying for an order of sale or possession;
• Applying for a charging order;
• Entering into an agreement with the bankrupt.

Question 11

Bankruptcy

What is the TIBs list of priorities for utilising the assets?

Answer 11

• Secured creditors (eg mortgages) dealt with first;
• Then expenses of bankruptcy (fees and costs of TIB and OR);
• Preferential debts - Pension scheme contributions, remuneration owed to employees (up to 4 months, capped at £800), holiday pay;
• Creditors with floating charges over assets (eg debentures);
• Unsecured creditors (including all tax, EXCLUDING debt owed to spouse/CP);
• Interest due on debts since bankruptcy;
• Debt’s to spouse/CP.

Question 12

Bankruptcy

Process for completing bankruptcy

Answer 12

Once the adminstration is complete the trustee calls a meeting of the creditors, presents their report and gets release to complete the bankruptcy.

Question 13

Bankruptcy

What are the effects of bankruptcy?

Answer 13

• Status lasts usually for 1 year, if deemed culpable they may remain undischarged for longer;
• Whilst undischarged they can’t:
  
  • Obtain credit of more than £500 without disclosing bankruptcy;
  • Trade under any other name than that in which they were declared bankrupt (unless they disclose this name);
  • Act as director of a company;
  • Work as an insolvency practitioner.

Question 14

Bankruptcy

Treatment of life assurance policies

Answer 14

If not under trust they will pass to the TIB.

Assets within trusts aren’t property of the bankrupt so are usually protected.

Question 15

Bankruptcy

Married Womans Property Act consideration

Answer 15

A life assurance policy under the MWPA is almost totally protected from the TIB.

Even if they can prove the policy was taken out to defraud creditors, they can’t claim the policy (although they can claim premiums paid).

Question 16

Bankruptcy

Treatment of pensions

Answer 16

Pension income will usually be included in assessment of IPO/IPA.

The funds within registered schemes are protected, although if they choose not to draw a pension they are entitled to they may be compelled to do so, and excessive pension contributions may be overturned.

Question 17

Bankruptcy

Treatment of trust assets

Answer 17

Generally trust assets are safe since they aren’t property of the bankrupt.

However in some cases the court can set the trust aside if the settlor transferred assets to conceal them from the bankruptcy.

Question 18

Bankrupcty

Rules around setting aside trusts

Answer 18

• If the petition is presented within 2 years, the TIB can get a court order setting aside the trust without having to prove insolvency at the time;
• For settlements where the spouse, relative, spouse of a relative or business partner is beneficiary, the TIB can have a trust put aside if the petition is presented within 5 years. They don’t need to prove intention to defraud creditors.

Question 19

Bankruptcy

To set aside trusts the bankrupt has settled into, what needs to be demonstrated to the court?

Answer 19

The creditors need to show:

• that the debtor was insolvent at the time they made the settlement into the trust; or
• that they became insolvent as a consequence of the settlement into the trust.

Otherwise the trust will stand.

Question 20

Bankruptcy

What is a Bankruptcy Restriction Order?

Answer 20

If the bankrupt has acted dishonestly the court can order a BRO for between 2 and 15 years.

Question 21

What is an Individual Voluntary Arrangement?

Advantages

Answer 21

An IVA is an alternative to bankruptcy where the debtor agrees to a voluntary agreement to repay some of the debt.

Advantages are:

• Lower costs;
• Debtor is involved in the process;
• Avoid the stigma of bankruptcy and disqualifications;
• Avoid the restrictions of bankruptcy.

Question 22

What are the downsides of an IVA (compared to bankruptcy)?

Answer 22

• This can potentially last a lot longer than bankruptcy (several years), which is usually finalised after 12 months;
• It offers less finalty than bankruptcy, which gives you legal protection from creditors once the process is complete;
• Leaving bankruptcy gives you a fresh slate, the same benefit isn’t necessarily true of an IVA.

Question 23

What is the process for an IVA?

Answer 23

The debtor applies to the court for an interim order which prevents creditors from forcing bankruptcy.

A creditors meeting is arranged where at least 75% (in value) need to accept the proposed terms of the IVA.

A supervisor or insolvency practitioner is appointed to oversee repayments in accordance with the scheme.

The agreement is binding on all creditors.

Question 24

What are deeds of arrangement?

Answer 24

Non legally binding, informal arrangement where the debtor writes to creditors and agrees a plan. Quick and cheap.

Question 25

What is a debt relief order?

Who administers them?

Answer 25

For people on low incomes with below £1k assets and qualifying debts of less than £20k (must meet other conditions too).

DROs are managed by the Insolvency Service and ‘approved intermediaries’, they don’t involve the courts.

An order usually lasts 12 months, after which if their circumstances haven’t changed they will be free of debt.

Question 26

Requirements for a debt relief order?

Answer 26

• Below £20k debts;
• Below £1k assets;
• Disposable income of below £50 per month (net of tax, NI etc).;
• Resident in the UK;
• No previous DRO in the last 6 years;
• Not involved in other insolvency proceedings.

Question 27

What is an administration order?

Requirements

Answer 27

If a creditor has a CCJ against somebody, the court can make an admin order as an alternative to bankruptcy.

The insolvent person makes payments to the court, which charges a small fee (around 10% of the debt) and passes the rest on to the creditors.

Can only be used where total debts are below £5k and money is owed to at least 2 creditors.

Question 28

What is a fast track voluntary arrangement?

Answer 28

This is a streamlined fast-track process that is arranged AFTER bankruptcy. The official receiver would apply for bankruptcy to be annulled if this is done.

There is the possibility of additional income for creditors which they wouldn’t be entitled to under bankruptcy.

It is only usually viable for small asset realisations and low levels of debt.