Personal Insolvency

Question 1

What are the options available to individuals in financial difficulty?

Answer 1

1. do nothing
2. do a deal with some or all of their creditors
3. seek the making of a bankruptcy order

Question 2

What is bankruptcy?

Answer 2

A collective insolvency procedure enabling an orderly collection, sale and distribution of an insolvent individual’s assets for the benefit of all that individual’s creditors.

Question 3

What is individual voluntary arrangement?

Answer 3

Similar to CVA.

Arrangement under which a debtor makes a proposal for a compromise of their liabilities with their creditors.

Usually the debtor will only pay part of the contractual debt owed or have a longer period to pay the debt.

Debtor will usually pay funds to the IVA Supervisor who will then pay dividends to creditors based on their claims.

Question 4

Who is the supervisor of the IVA?

Answer 4

A licensed insolvency practitioner must be appointed as Supervisor of the IVA.

Question 5

How long is an IVA?

Answer 5

Can be any amount of time but usually 3-5 years.

Question 6

How do you set up an IVA?

Answer 6

1. Debtor drafts proposal usually with assistance of insolvency practitioner (Nominee)
2. Nominee submits report to the court
3. Debtor can apply for an interim order - if granted it brings about a moratorium which lasts 14 days
4. For proposal to be binding, must be approved by creditors holding at least 75% of the value of the total debt (but won’t be effective if more than half the total value of creditors who are not associates of the debtor vote against it)

Question 7

What is a moratorium?

Answer 7

An order that freezes existing or proposed bankruptcy and other proceedings and legal processes (including execution, landlord’s right of peaceable re-entry and/or distress for rent) against debtor.

Question 8

Who is bound by the approval of an IVA?

Answer 8

If approved, IVA binds the debtor and all of their unsecured creditors.
An IVA cannot bind a secured creditor or preferential creditor without that creditor’s consent.

Question 9

What happens to the nominee on approval of the IVA?

Answer 9

Nominee becomes the supervisor of the IVA and is responsible for its implementation.

Question 10

What are the advantages of an IVA?

Answer 10

It is an alternative to bankruptcy and avoids the stigma and restrictions associated with bankruptcy

It can bind all unsecured creditors

A moratorium is available if an interim order is made

Question 11

What are the disadvantages of an IVA?

Answer 11

May last longer than a bankruptcy

Cannot bind a secured creditor or preferential creditor without that creditor’s consent

Can be an expensive and time-consuming process and there is some uncertainty as to whether creditors will approve it

Question 12

What are the grounds/requirements for a creditor’s petition for bankruptcy?

Answer 12

• A ground for the petition is that at the time of presentation of the petition, the debt is one the debtor appears unable to pay or has no reasonable prospect of paying
• The debt owed to the creditor is for an unsecured liquidated sum exceeding £5,000
• The debtor must be domiciled or present in England and Wales

Question 13

What are the grounds/requirements for a debtor’s petition for bankruptcy?

Answer 13

• The only ground for this petition is that the debtor is unable to pay their debts
• The petition must be accompanied by a statement of affairs setting out the debtor’s assets and liabilities

Question 14

How is a debtor’s inability to pay debts evidenced?

Answer 14

Evidenced by:
- a statutory demand that has neither been satisfied within three weeks from service of that demand, nor set aside by the court; or
- an unsatisfied execution of a judgement or of another legal process

Question 15

On the making of a bankruptcy order, what is the bankrupt (whilst discharged) prohibited from doing?

Answer 15

• Acting as a director or being involved in the management of a company
• Obtaining credit of over £500 without disclosing the bankruptcy
• Giving gifts and practising in certain professions
• Also deprived of ownership of their property except for their reasonable domestic needs

Question 16

What happens to the bankruptcy estate upon the making of a bankruptcy order?

Answer 16

The Official Receiver will become the first trustee in bankruptcy unless court orders otherwise.

Majority of creditors can seek the appointment of another person as Trustee (who must be a licensed insolvency practitioner).

Question 17

Bankruptcy Trustee: powers and duties

Answer 17

Vests automatically as an operation of law upon the making of the bankruptcy order.

Trustee has wide statutory powers to sell or otherwise deal with the assets in the estate.

Trustee will collect in assets and sell them, distributing money in accordance with statutory order.

Question 18

Bankruptcy - order of priority payments:

Answer 18

1. Secured creditors
2. Expenses of the bankruptcy including Trustee’s remuneration
3. Two tiers of preferential creditors
4. Ordinary unsecured creditors
5. Statutory interest
6. Debts of a spouse; and
7. Any surplus payable to the bankrupt

Question 19

What are the bankrupts’ duties?

Answer 19

Duty to:
- Give to a trustee information about his affairs
- provide assistance to trustee
- anything else that the trustee requires to carry out their functions

Question 20

When does a bankruptcy automatically discharge?

Answer 20

After one year

Official receiver or trustee may apply to suspend automatic discharge if bankrupt fails to comply with the obligations

Can also be less than a year if OR/Trustee concludes investigation earlier

Question 21

What is a Bankruptcy Restriction Order?

Answer 21

Secretary of State or Official Receiver on the SS behalf