Bankruptcy Flashcards
What is bankruptcy?
- Where a person cannot or will not pay their debts.
- if an individual is made bankrupt, virtually all of their assets are taken and shared among the creditors.
What is the procedure before making a bankruptcy order?
A petition is presented (Insolvency Act 1986)
o Creditor/creditors owed/owed jointly £5,000 unsecured debt
Must prove debtor’s inability to pay
Debtor not complied within 3 weeks to statutory
demand requiring them to pay
Bailiff’s unable to collect
o Debtor can petition themselves to stop creditors harassing them
Must be unable to pay
o If debtor disposes of any assets after petition presented, transaction can be voided if bankruptcy goes ahead (unless court decides otherwise)
o Petition now made online
No need to go to court
Adjudicator decides to make bankruptcy order or not
What is the procedure following a bankruptcy order?
Official Receiver (OR) takes control of debtor’s assets
o Debtor submits statement of affairs
o OR decides whether to call creditors’ meeting to enable creditors to appoint insolvency practitioner as trustee in bankruptcy (TIB)
Must call meeting if 10% (by value, i.e. amount owed) of creditors demand it
If no meeting, OR acts as TIB
The TIB collects bankrupt’s property, sells it and uses proceeds to repay creditors
What happens to the bankrupts property following a bankruptcy order?
- Debtor can keep;
o Tools, books, vehicles needed for employment/self-employment
o Household essentials to meet basic domestic needs
o Property held on trust for another - Property belongs to TIB - property no longer legally the debtors;
o Once bankruptcy discharged it has to be assigned back to debtor
It does not automatically revert to them
o TIB can claim any asset debt or receives during bankruptcy (e.g.an inheritance)
What happens to the bankrupts income following a bankruptcy order?
TIB will use income in excess of that needed by debtor for essential expenses to pay off debts
o TIB can ask debtor to sign
IPA = income payment agreement
IPO = income payment order
Both require debtor to make contributions to pay off debts if affordable
IPA/IPO state amount to be paid / % of income to be contributed for
Also state timescales (3 years maximum)
o TIB can ask court for attachment of earnings order
Employees only – ask for salary to be paid direct to bankrupt’s estate
o If bankrupt’s income rises or falls IPA/IPO can be reviewed/suspended
o Failure to comply with IPA/IPO can prevent automatic discharge from bankruptcy
What happens to the bankrupts home - immediate sale?
If debtor does not live with spouse/civil partner/children under 18 their share of property goes to TIB who can obtain an order for sale and sell the property
TIB has up to 3 years to do so, after then the property will not form part of bankrupt’s estate and automatically reverts to bankrupt UNLESS, the TIB realise their interest, apply for an order of possession, apply for a charging order or enter into an agreement with the bankrupt re their interest
What happens to the bankrupts home - shared interest?
TIB can only claim debtor’s interest
If property is in joint names, other party may have a legal or beneficial interest (paid towards purchase) or a statutory right of occupation
TIB must apply for court order.
Court will consider interests of creditor(s), needs of spouse/civil partner/children, their resources, and whether conduct of spouse/civil partner contributed to bankruptcy
Cohabitee - not the same legal rights
What happens to the bankrupts home - delayed sale?
No eviction without court consent if debtor only has beneficial interest in the home or just a right of occupation and home is occupied by children.
Court will consider needs of creditors and children as well as the bankrupt’s resources
After 1 year, creditors’ needs take precedence except in exceptional cases
Spouse/civil partner will be given their share of proceeds for loss of legal/equitable rights
What happens to the bankrupts home - Security for loans?
If borrower wishes to secure debt on a home they own with another person, then other person normally asked to postpone their interest in favour of the lender or lender will insist debt is taken out jointly - so that other party is subject to mortgage in any case
What is an Official Receiver (OR)?
- Officer of court
Involved in every bankruptcy
When bankruptcy restriction order
made (BRO) must investigate bankrupt’s affairs and report to their creditors
BRO usually appoints OR as receiver and manager of bankrupt’s estate.
o OR must identify and preserve bankrupt’s assets before appointment of TIB
OR decides whether to call creditor meeting to appoint insolvency practitioner as TIB
If they do not, OR acts as TIB
What is the role of a Trustee in Bankruptcy?
- Realise assets
- Pay creditors
- If assets insufficient follow priority for
payment rules - Once all assets have been distributed, the OR/TIB calls another creditors’ meeting to present their report and gain their agreement to release the bankrupt - completes the bankruptcy
What are the priority for payment rules?
Secured creditors first (who, because of their security can choose not to participate in the bankruptcy)
If any assets left then,
- The expenses, fees and costs of the OR/TIB
- Preferential debts (pension scheme contributions and up to four months wages owing to employees (£800 cap) including holiday pay (no cap)
- Any creditor holding a floating charge over an asset
- Unsecured creditors and other debts (wages above cap, tax)
- Interest due on all debts since the BRO
- Debts due to the bankrupt’s spouse or civil partner
If a particular class of creditor cannot be repaid in full, they are prioritised equally and assets left divided equally amongst them
Who is a secured creditor?
Have some security for the debt - eg. house
If value of secured asset is greater than debt, then can enforce the security and be paid - If not, can take part in bankruptcy;
o Can value security and take part in bankruptcy for unsecured part
o Can give up security and take part in bankruptcy for whole debt
o Can enforce security and take part in bankruptcy for remainder (usual)
Name some restrictions for a individual who is subject to bankruptcy order?
They cannot;
- Get credit of £500 or more from a single lender without telling the lender about their bankruptcy
- Act as a director or get involved with setting up, promoting or running a company without permission from the court
- Carry out a business in a different name from the one under which they were made bankrupt, without telling everyone they do business with the name under which they were made bankrupt
- Act as an insolvency practitioner.
These restrictions do not apply to a bankrupt’s spouse/civil partner who is not liable for their debts (unless they’re business partners).
In addition to disclosing all their assets to the TIB the bankrupt must not:
Hide debts/assets from TIB Destroy/falsify records Make false statements to TIB Sell assets to defraud creditors Give preference (fraudulently) to one creditor over any other Leave UK Take assets outside of UK
These restrictions do not apply to a bankrupt’s spouse/civil partner who is not liable for their debts (unless they’re business partners).
What happens to transactions prior to bankruptcy if sold undervalue?
In general, bankruptcy will not affect prior transactions.
TIB can attack transactions if bankrupt disposes of an asset at significantly less than it’s worth if;
5 years prior to BRO, TIB can ask court to set transaction aside if debtor was insolvent at the time / became insolvent as a result
2 years prior can ask court to set aside in any event
Transactions prior to bankruptcy - preferences
ie. Where treat one creditor more favourably than another - Voluntary action by debtor
Not a preference if done under threat of bankruptcy, nor if creditor about to call bailiffs to satisfy a county court judgment
o TIB can ask court to set aside preference made 6 months prior to bankruptcy or 2 years if recipient is an associate
Trustee must prove debtor insolvent at time / became insolvent as a result
If recipient is an associate, preference is assumed unless debtor can prove otherwise
Spouse / civil partners, relatives or either party and their respective spouse and civil partners are all examples of associates
Transactions prior to bankruptcy - Transactions defrauding creditors
TIB can ask court to set aside transaction if it was made at an undervalue for purpose to make property unavailable to repay creditors
No time limit but hard to prove if done years ago
What happens when bankrupt is discharged from bankruptcy?
Usually automatic discharge 1 year after BO made
Bankruptcy restrictions are automatically lifted
o Unless they subject to a BRO/BRU
Former bankrupt is free from debt
o Even if debts weren’t paid in full, except for;
Damages owed due to personal injury arising from former bankrupt’s negligence Maintenance / matrimonial orders Student loans Fines / debts arising from fraud
Property acquired after discharge belongs to former bankrupt - does not vest with TIB
Property vested in TIB remains the property of TIB
o Exception - 3 year rule on family home
Must continue to help TIB realise and distribute assets if this is ongoing
What is a bankruptcy restriction order (BRO) and undertakings (BRU)?
- Extend the consequence of bankruptcy - in effect preventing discharge
- Can last between 2-15 years
- Potential if bankrupt has acted dishonesty or in a blameworthy fashion ie.
- failure to keep proper accounting records
- preferences + transactions at undervalue
- excessive pension contributions
- failure to cooperate with OR or trustee
- Application for BRO must be made within 1 year of bankruptcy order - need court approval otherwise
- Interim BRO possible between app + the decision
- Rather than go to court OR may accept offer of bankruptcy restrictions from bankrupt (BRU). Lasts from acceptance by OR until date stated on BRU
- Insolvency service keeps public register
- Lists BROs, interim BROs and BRUs
The Effects of Bankruptcy on Investments
Ownership passes to the OR/TIB (unless jointly owned in which case it becomes jointly owned by the OR/TIB and the other party).
The OR/TIB can then encash the investment to repay creditors, or claim any income arising from the investment to repay creditors.
Investments remain in the ownership of the OR/TIB after discharge, until they are re- assigned to the bankrupt.
The Effects of Bankruptcy on Life Assurance policies NOT written in trust
The policy becomes the property of the OR/TIB who can stop the premiums and surrender the policy if appropriate, in order to use the proceeds to repay creditors.
The Effects of Bankruptcy on Life Assurance policies written in trust
Because the policy is written in trust it doesn’t belong to the bankrupt and therefore cannot become the property of the OR/TIB unless it can be attacked as a prior transaction.
If the settlor is the bankrupt the OR/TIB can stop the premiums being paid (because they control the bank account).
The Effects of Bankruptcy on a policy under the Married Women’s Property Act 1882 (MWPA)
The OR/TIB cannot claim the policy proceeds even if they can prove the policy was taken out deliberately to defraud creditors.
If that is the case all the OR/TIB can do is reclaim premiums paid.
The Effects of Bankruptcy on pensions - pre 29 May 2000
If bankruptcy occurred, then the pension rights are included in the bankrupt’s estate, but the OR/TIB can only claim the max PCLS and residual pension when the bankrupt reaches their retirement date, or age 55 if sooner.
The OR/TIB’s right to do this extends beyond discharge.
The Effects of Bankruptcy on pensions - post 29 May 2000
All registered pension rights are excluded from the bankrupt’s estate (not unregistered schemes though).
OR/TIB can apply to the courts if they feel excessive pension contributions have been made that prejudice creditors
Courts can order the pension restored to a position as if the excessive contributions hadn’t been made and the excess paid over to the OR/TIB.
In Horton v Henry (2014) it was determined that a DC pension that is not already in payment, but where it could be because the scheme member is over the age of 55, could not be the subject of a court order.
Unregistered pensions are not protected and would go to TIB.
The Effects of Bankruptcy on trusts (settlor)
No effect on trust unless it can be attacked as a prior transaction.
Court can set trust aside where settlor transferred assets into it to deliberately put them out of creditors’ reach at future date
- Dishonesty not the test
- TIB just needs to prove intent
Court can set trust aside if become bankrupt within 2 years of transfer into trust
- No need to prove insolvency at the time/became insolvent, nor that the intent was to deprive creditors
Court can set trust aside if become bankrupt within 5 years if beneficiaries include settlor’s associates or business partner(s)
- No need to show intent to deprive creditors
- Trustees of trust (notTIB) can resist if settlor was
solvent at the time and they can prove on balance of
probabilities that they were
More than 5 years prior to bankruptcy likely to be safe
The Effects of Bankruptcy on trusts (trustee)
No effect on trust property;
- May bring into question trustee’s suitability
- May wish to remove them
- Bankrupt cannot be a charitable trustee
The Effects of Bankruptcy on trusts (beneficiary)
No effect on trust property;
- TIB may claim income arising that beneficiary is entitled to
- If it is a discretionary trust, trustees should probably avoid making payments
Alternatives to Bankruptcy - Individual Voluntary Arrangement (IVA)
IVA less formal arrangement without ongoing restrictions or stigma of bankruptcy. Procedure for IVAs is:
- Debtor makes formal proposal to creditors to pay all or part of debt(s)
- If creditors agree, a supervisor (an authorised insolvency practitioner) is appointed to oversee repayments
- Debtor and supervisor set out plan for how much will be repaid and what assets are included
- Debtor can apply to courts for grant of an interim order to prevent creditors applying for bankruptcy order while IVA being sorted
- Creditors’ meeting held where supervisor sets out proposed repayment schedule and the creditors agree with it (or not)
If creditors representing at least 75% of debt agree then all creditors are bound to agreement
If the creditors do not agree, they can apply for a BRO
• Supervisor makes payments to creditors as per agreed schedule
• Once all sums paid, IVA ends
• IVA usually lasts five years
• If IVA fails, supervisor gives notice to creditors and applies to court for a BRO
• Advantages
o debtor closely involved in process, avoid restrictions, stigma and disqualifications of bankruptcy, lower costs.
Alternatives to Bankruptcy - Deeds of arrangement
AKA informal arrangements, family arrangements, debt management plans, debt management agreements
• Debtor writes to creditors to ask for an informal arrangement
• Debtor assess amount they can afford to pay each month after meeting basic needs
• If creditors agree to amount and timetable can go ahead
• Quick and cheap to set up
• But not legally binding
o Creditors can ignore and seek full debt repayment
Alternatives to Bankruptcy - Debt relief order (DRO)
- Introduced in April 2009
- Assets less than £1,000 and qualifying debts of less than £20,000.
- Last for a year during which time creditors cannot take any action to recover their money.
- At the end of the year if nothing else has changed the debtor is free from debt.
Qualifying conditions:
• Debtor has assets less than £1000
• Debtor can have a disposable income of no more than £50 per month (after tax, NI and household expenses)
• Must have lived, had a property or worked in England or Wales at some point in the past three years
• Must not have been subject to another DRO in the past six years - this means;
- Cannot borrow more than £500 without informing lender of DRO,
- act as director, create / manage / promote a company without court’s consent or manage a business without telling customers of their DRO
• Must not be involved in any other type of formal insolvency proceeding
Alternatives to Bankruptcy - administration order
Alternative to bankruptcy where county court judgment is made against someone
• Make regular payment to court
• Court pays creditors
• Court charges administration fee - up to 10% of debt
• Total debt must be no more than £5,000
• Money owed to at least 2 creditors
• Debtor must have regular income (weekly or monthly)
• If debtor fails to pay, subject to restrictions similar to those of bankruptcy
Advantages
o 1 monthly payment to court
o Payment based on affordability
o Creditors cannot take further action without court consent
Disadvantages
o Miss 1 payment, arrangement fails
o Arrangement noted on Register of County Court Judgments which affects credit rating
o Must owe less than £5,000 and have a CCJ against them
