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BL&P > 8. Personal Insolvency > Flashcards

8. Personal Insolvency Flashcards

1
Q

When is an individual insolvent?

A
  • a debt is payable but the debtor does not currently have enough money to pay
  • a debt is payable in the future and there is no reasonable prospect that the individual will be able to pay
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2
Q

Three ways to prove personal insolvency

A
  1. By serving a statutory demand on the debtor for a liquidated sum of £5,000 or more, and waiting three weeks to see whether the debtor pays or applies to court to set aside the statutory demand.
  2. By serving a statutory demand on the debtor in respect of a future liability to pay a debt of £5,000 or more, and waiting three weeks to see whether the debtor either:
  3. shows a reasonable prospect of being able to pay the sum when it falls due; or
  4. applies to court to set aside the statutory demand.
  5. By obtaining a court judgment for a debt of £5,000 or more, and attempting execution of the judgment without success.
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3
Q

If a person is insolvent, what options do they have?

A
  1. Debtor can try talking to creditors to come to an agreement
  2. Debtor can apply for their own bankruptcy
  3. Debtor can enter into an individual voluntary arrangement (IVA) or apply for a debt relief order
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4
Q

What debts will a bankrupt still be subject to after discharge

A

Student loan debts

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5
Q

First step in the bankruptcy procedure

A

Bankruptcy begins by a creditor presenting a petition in court or by debtor applying for bankruptcy

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6
Q

If creditors petition for bankruptcy of an individual, what must they pay

A

Creditors must pay a deposit to meet the costs of the trustee in bankruptcy and the court fee

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7
Q

How can an individual apply for their own bankruptcy

A
  • The debtor applying must do so online
  • an adjudicator then decides whether to bank the order
  • Debtor must pay application fee and deposit in respect of the official receiver’s administration fee
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8
Q

Deadline for an adjudicator to make an order wrt bankruptcy for an individual

A

The adjudicator must make the order or refuse to make one within 28 days of the application *unless further information is required and deadline extended to 42 days

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9
Q

Role of the Official Receiver

A
  • Acts as trustee in bankruptcy, takes control of the bankrupt’s assets
  • OR employed by insolvent service and is an officer of the court
  • OR may ask debtor for statement of affairs, detailing their financial position and recent transactions and may further investigate these
  • OR will take steps to protect property of the debtor and will dispose of / sell property perishable or decreasing in value
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10
Q

Role of a Private Trustee in bankruptcy / when are they appointed

A
  • Will only be appointed by creditors when the bankrupt has enough assets to fund their fees
  • Whether trustee is an OR is a private trustee, the bankrupt’s estate vests in them automatically as soon as the order is made
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11
Q

Is a bankrupt entitled to keep personal property?

A

the bankrupt is permitted to keep assets needed for ‘day to day’ living, items they need for work and everyday household items

  • If any of these are of high value, the trustee can sell them and replace them with a cheaper alternative
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12
Q

Are bankrupts entitled to their salary

A

Bankrupts are entitled their salary, but if this is quite high the trustee can ask them to enter into an income payments agreement (IPA) where they pay some of their salary to the trustee

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13
Q

What if a bankrupt and a trustee cannot agree on a fair amount for an IPA sum

A

If bankrupt / trustee cannot agree on an IPA sum, the trustee can apply to court for an income payments order (’IPO’) and court will determine amount payable

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14
Q

General duration of an IPA / IPO

A

IPA / IPO generally last for a maximum of 3 years from the date the arrangement or order is made and will survive debtor’s discharge from bankruptcy

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15
Q

If a bankrupt is discharged, do they remain liable for the IPA / IPO?

A

Yes, it is active for the duration specified, even if the bankrupt is discharged

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16
Q

What happens to the bankrupts home on declaring bankruptcy

A

Interest in the bankrupt’s home passes to the trustee

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17
Q

Does the bankrupt ever get the ownership of their home back?

A

the ownership of the home transfers back to the bankrupt unless the trustee has

  1. sold the property
  2. applied for an order for sale or possession or a charging order over the house; or
  3. entered into an agreement with bankrupt regarding home (eg. they can keep interest in the home in exchange for payment)
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18
Q

Can an OR still sell the bankrupts home if there are others in the home with an interest in it

A

Trustee will need a court order to sell the house
- Court will consider conduct and needs of current or former spouse and needs of children

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19
Q

Why is it easier to sell the bankrupts home after one year of bankruptcy - rather than at the onset

A

After 1 year of bankruptcy, under s 335A, the creditors’ interests outweigh those of anyone else living in the house unless circumstances are exceptional - so trustee very likely to successfully get an order for sale

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20
Q

Primary duty of the trustee

A

To maximise assets available to creditors

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21
Q

Options for the trustee in carrying out their duty

A
  1. disclaim onerous property
  2. apply to set aside transactions at an undervalue
  3. apply to set aside preferences
  4. apply to set aside transactions defrauding creditors
  5. avoid extortionate credit transactions
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22
Q

What does it mean to disclaim onerous property

A

General Rule: The trustee may disclaim onerous property, for example, unprofitable contracts, land that has the burden of an onerous covenant or a lease which does not have a capital value to be realised for the creditors’ benefit

23
Q

Effect of disclaiming onerous property

A

The trustee’s disclaimer means that all of the bankrupt’s rights and liabilities in respect of the onerous property come to an end and the trustee is discharged from personal responsibility for the property.

24
Q

What happens if the trustee disclaims certain onerous property and someone suffers loss (ie. money they would have earned in the disclaimed contract) what recourse exists for them?

A

If anyone suffers loss as a result of the disclaimer (for example, the money they would have earned on an onerous contract), they may prove as an unsecured creditor in the bankruptcy, meaning that they can make a formal claim to be a creditor of the bankrupt.

25
Q

Scope of transactions which can be investigated as transactions at an undervalue

A

The trustee can investigate transactions during the 5 years prior to the presentation of the bankruptcy petition

26
Q

Does the trustee need to prove bankruptcy was caused by the transaction at an undervalue / already had occurred to successfully void the transaction?

A

The trustee does not have to show that the bankrupt was insolvent at the time of the transaction or as a result of the transaction, UNLESS the transaction was more than two years
before the petition.
- If the transaction was with an associate (a close relative or business associate (s 435 IA 1986)), then even if the transaction was more than two years prior to presentation of the bankruptcy petition, there is a rebuttable presumption that the bankrupt was insolvent at the time of the transaction

27
Q

Presumption of preference - when does it arise / who?

A

General Rule: There is a rebuttable presumption of intention to prefer if the preference is in favour of an associate (essentially a close relative or business associate).

28
Q

Timing of preferences that the trustee can challenge

A

The trustee can challenge any potential preferences within the six months prior to the presentation of the bankruptcy petition, or within the two years prior to presentation of the petition if the preference is in favour of an associate.
- The bankrupt must have been insolvent at the time of the preference, or must have become insolvent as a result of it.

29
Q

Transactions defrauding creditors:

A

Same as corporate insolvency

30
Q

Extortionate Credit Transactions: When can they be set aside

A

General Rule: If the bankrupt has obtained any credit in the three years prior to the bankruptcy order, and the terms of the credit are ‘extortionate’, the trustee can apply to set aside or vary the terms of the credit

31
Q

Order of distribution of assets

A
  1. Secured creditors sell their charged assets, take what is owed and pay surplus to trustee (if shortfall, they become unsecured)
  2. The costs of the bankruptcy. This means all of the expenses incurred as a result of the bankruptcy, which will be mainly the trustee’s professional charges and disbursements (eg legal fees).
  3. Preferential debts.
  4. Ordinary unsecured creditors.
  5. Postponed creditors, who are the bankrupt’s spouse or civil partner.
    • Creditors within each category rank and abate equally
32
Q

Preferential Debts: who is included

A

Preferential debts include the wages/ salary of employees for work carried out in the four months immediately preceding the date of the bankruptcy of their employer, up to a maximum of £800, plus accrued holiday pay owed to employees.

33
Q

General Rule wrt timing of discharge for a bankrupt

A

A bankruptcy order is discharged automatically after one year, unless discharge is suspended

34
Q

Upon discharge, does the trustee return property vested in them?

A

The property which was vested in the trustee is not returned to the bankrupt, apart from the matrimonial home in some cases

35
Q

What items can a bankrupt keep: Business

A

General Rule: Bankrupts are allowed to keep items they need for work (the ‘tools of their trade’) and a vehicle if it is essential for work.

36
Q

Restrictions on bankrupts: Business

A
  1. obtain credit of more than £500 without disclosing their bankruptcy. (criminal offence)
  2. act as a director of a company (Company Directors Disqualification Act (‘CDDA’) 1986)
  3. be involved in the management, promotion or formation of a company, unless the court grants permission (CDDA 1986);
  4. trade under a different name from the name in which the bankruptcy order was made, without disclosing to anyone they trade with that they are an undischarged bankrupt; or
  5. continue in partnership, unless the partnership agreement varies the default position in the Partnership Act 1890, which is that the bankrupt will automatically cease to be a partner when they are made bankrupt.
37
Q

Personal restrictions of bankrupts

A

General Rule: Undischarged bankrupts cannot obtain credit of more than £500 without informing the lender that they are an undischarged bankrupt. (applies to obtaining credit card or having normal current account - would need one without overdraft)

38
Q

Can a bankrupt become a solicitor?

A

Not without leave from the SRA

39
Q

What are bankruptcy restrictions orders

A

Bankruptcy restriction orders are designed to protect the public from those bankrupts who are considered to be ‘culpable’ and to have caused their own bankruptcy by being dishonest, negligent or reckless. They are made by the court and last between two and 15 years.

40
Q

What is a bankruptcy restriction undertaking

A

An alternative to a BRO (same effect)

41
Q

Effect of BRO / BRU

A

Means this person cannot act as a company director (or insolvency practitioner or MP) for the length of the order or undertaking, or obtain credit over a certain amount (currently £500) without disclosing
the BRO.

42
Q

Alternatives to personal bankruptcy

A
  1. IVAs
  2. negotiating with creditors
  3. debt relief orders
  4. debt respite scheme
43
Q

What is an IVA

A

it is a binding agreement between unsecured creditors, setting out how much each creditor will receive from the bankrupt in settlement of their debts.

44
Q

Can an individual bankrupt formulate an IVA on their own?

A

They will need the professional help of an insolvency practitioner who will effectively formulate the proposals and supervise their implementation if the creditors approve the process. The insolvency practitioner is initially known as the debtor’s nominee and will only agree to act if there are sufficient assets to pay their fees. Once the IVA is approved, they are renamed as the supervisor of the arrangement

45
Q

Procedure of obtaining an IVA

A
  1. Once the debtor has appointed a nominee to act with them, the debtor must prepare a statement of affairs for the nominee to consider
  2. Debtor should then apply to the court for an interim order to obtain a moratorium (order usually in force for 14 days)
  3. The nominee then prepares a report for the court stating whether the debtor has put forward any realistic proposals and therefore whether they are prepared to support the calling of a creditors’ decision- making process.
  4. If such a process takes place and (1) 75% or more of the creditors in value (2) of which at least 50% in value are not associated of the debtor agree to the proposals, they will be approved
  5. If the creditors approve the IVA, the nominee, who, as stated earlier, is from that point onwards called a supervisor, implements the proposals.
46
Q

If an IVA is approved and it is later discovered the debtor is not complying or provided false information - what can happen

A

the supervisor, or any of the creditors who are party to the IVA, can petition for the debtor’s bankruptcy.

47
Q

Why would it be advantageous to petition to the debtor’s bankruptcy if they fail to comply with an IVA

A

Because a trustee can set aside certain transactions - getting more money for unsecured creditors

48
Q

Which creditors are bound by an IVA

A

Every ordinary, unsecured creditor entitled to attend and vote is bound by the decision, even if they did not actually attend the meeting.
- The IVA is not binding on preferential or secured creditors unless they specifically agree to it.

49
Q

Why is information negotiation with creditors not the best option for someone hoping to avoid bankruptcy

A

An informal arrangement with one or more creditors may enable the individual to avoid bankruptcy. However, because any arrangement would be informal, it would not stop another creditor issuing a bankruptcy petition.

50
Q

When can a debtor apply for a debt relief order

A

If their assets and liabilities are low
1. unsecured liabilities must not exceed 50 000
2. total gross assets must not exceed 2 0000
3. car must not exceed 4 000 unless adopted because debtor has disability
4. disposal income cannot exceed 75 per month after deducting normal household exp.
5. cannot have been subject to a DRO in the preceding six years; or
6. cannot be subject to another, formal insolvency procedure.

51
Q

Debt respite scheme: two types

A
  1. standard breathing space
  2. mental health crisis breathing place
52
Q

When is a standard breathing space available

A

A standard breathing space is available to any client with problem debt, and it gives them legal protection from creditor action for up to 60 days (a moratorium). The protection includes pausing most enforcement action and contact from creditors and freezing most interest and charges on their debts.

53
Q

When is mental health crisis breathing space available?

A

A mental health crisis breathing space is only available to a client who is receiving mental health crisis treatment. The mental health crisis breathing space has some stronger protections than the standard breathing space. It lasts as long as the client’s mental health crisis treatment, plus 30 days (no matter how long the crisis treatment lasts)

54
Q

Disqualifications when apply for breathing space

A
  1. if debtor has had breathing space in the previous 12 months
  2. if debtor is undischarged bankrupt
  3. if debtor is in an IVA
  4. if debtor is subject to a debt relief order

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