Unit 7 – Personal Insolevncy

Question 1

When is an individual insolvent?

Answer 1

1) A debt is payable now but the debtor does not currently have enough money to pay; or

2) A debt is payable in the future and there is no reasonable prospect that the individual will be able to pay.

Question 2

What are the 3 ways a creditor can prove an individual to be insolvent?

Answer 2

1. Statutory demand (a) – 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. Statutory demand (b) – 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:

(a) Shows a reasonable prospect of being able to pay the sum when it falls due; or

(b) Applies to court to set aside the statutory demand.

3. Court judgement – By obtaining a court judgement for a debt of £5,000 or more and attempting execution of the judgement without success.

Question 3

What are the 4 options for the insolvent person?

Answer 3

1. Negotiate an agreement with the creditor;
2. Apply for their own bankruptcy;
3. Enter an individual voluntary arrangement (IVA) or apply for a debt relief order.
4. Enter into Debt Respite Scheme – gives the debtor protection from creditor action for up to 60 days.

Question 4

Where someone is declared bankrupt, how long does this last?

Answer 4

– After one year, the bankrupt is discharged, meaning that the bankruptcy ends and the bankrupt is free from almost all their debts, even though the bankrupt has not paid all of their debts in full.

Question 5

What is the process for a bankruptcy petition brought by a creditor?

Answer 5

– Brings a petition at court (only if theyre owed £5,000 or more as a FIXED sum) e.g., cannot be damages.

– Creditor proves personal insolvency

– Creditor must pay a deposit to meet the costs of the trustee in bankruptcy and the court fee.

– Creditor must present a petition at the debtor’s local county court hearing centre, as long as it has jurisdiction in bankruptcy matters.

Question 6

Where there are multiple creditors, owing less than £5,000 can they join together to bring a petition?

Answer 6

Yes.

Question 7

What must the creditor arrange for in terms of serving the peittion?

Answer 7

1) Personal service – has to be handed to the debtor and provide a witness statement that they’ve done so

2) Substituted service if the debtor is avoiding them – e.g., posting through letterbox / other method is deemed sufficient.

Question 8

What is the process for a debtor to apply for their own bankruptcy?

Answer 8

– Ground for application = debtor is unable to pay their debts.

– Debtor will need to pay for the fees for the application and a deposit in respect of the Official Receiver’s administration fees.

–The adjudicator must make a bankruptcy order – or refuse to make one because the debtor has not proven that they’re unable to pay their debts¬ – within 28 days from the application.

–Where adjudicator requires extra information, they can extend the decision deadline to 42 days.

Question 9

When does the bankrupt’s estate vest in the Official receiver?

Answer 9

From the moment of bankrupcy order is made.

Question 10

When might a private trustee in bankruprcy be appointed?

Answer 10

By creditors if the bankrupt’s assets can cover the fees.

Question 11

What are the OR’s powers for personal bankruptcy?

Answer 11

• Investigate the bankrupt’s affairs
• Set aside/ challenge transactions which the bankrupt entered into before the bankruptcy order was made
• Realise and sell assets

Question 12

What property are bankrupts allowed to keep?

Answer 12

some assets which are needed for every-day living, i.e., items they need for work and everyday household items like furniture and clothing.

– If any of these items are high value, the trustee can sell them and replace them with a cheaper alternative.

– Permitted to be paid their salary.

Question 13

What is an income payment agreement?

Answer 13

– Income payment agreement = If salary is more than sufficient to meet the reasonable needs of the bankrupt and their family, the trustee can ask the bankrupt to enter into an income payment agreement.

– OR can apply to court for an income payments order & court determines amount to pay.

Question 14

What happens to the bankrupt’s home?

Answer 14

Bankrupt’s interest in their home passes on the trustee.

Question 15

What id there is another legal / equitable interest in the house?

Answer 15

– If someone else has a legal/equitable interest in the house, a court order is needed to sell the house and bankrupt cannot be evicted.

Court will consider:

• All the relevant circumstances
• Interests of creditors
• Conduct and needs of a current or former spouse / civil partner/ children

Question 16

After 1 year of bankruptcy, if there are other interests in the house, what happens to them?

Answer 16

– After one year of bankruptcy the creditors’ interests outweigh those of anyone else living in the house unless the circumstances are ‘exceptional’.

Question 17

After 3 years of bankruptcy, what happens to other intesters in the house?

Answer 17

 Three years after the bankruptcy order, ownership of the home transfers back to the bankrupt unless the trustee has:

(a) Sold the property;

(b) Applied for an order for sale or possession or a charging order over the house; or

(c) Entered into an agreement with the bankrupt regarding the home.

Question 18

Who is the offical receiver’s duty to?

Answer 18

Creditors.

Question 19

What can the official receiver do to preserve and increase bankrupt’s assets?

Answer 19

1) disclaim onerous property

2) Apply to set transactions at an undervalue aside

3) Apply to set aside preferences

4) Apply to set aside transactions defrauding credditors

5) Avoid extortionate credit transactions.

Question 20

1) Disclaim onerous property

Answer 20

 E.g., unprofitable contracts, land which has been the burden of an onerous covenant or a lease which has no capital value to be realised.

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

 If anyone suffers a loss as a result of the disclaimer, they become an unsecured creditor in the bankruptcy (they can make a formal claim to be a creditor of the bankrupt).

Question 21

2) Transactions at an undervalue

Answer 21

 OR can investigate transactions during the 5 years prior to the presentation of the bankruptcy petition and any transactions at an undervalue can be set aside.

 OR 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 2 years before the petition.

 If transaction was with a close relative/business associate, there is a rebuttable presumption that the bankrupt was insolvent at the time of the transaction (even if it was more than 2 years prior to the presentation of the bankruptcy petition).

 Also applies to gifts. I.e., where there was no consideration provided.

Question 22

3) Preferences

Answer 22

 There is a rebuttable presumption of intention to prefer if the preference is in favour of an associate (a close relative/business associate).

 OR can challenge any potential preference within the 6 months prior to the presentation of the bankruptcy petition, or within 2 years prior to presentation of the petition if the preference is in favour of an associate (relative or business associate).

 Bankrupt must have been insolvent at the time of the preference, or must have become insolvent as a result of it.

Question 23

5) Avoiding extortionate credit transactions

Answer 23

If bankrupt has obtained credit under extortionate terms in the three years prior to the bankruptcy order, OR can apply to have it set aside or vary terms of the credit.

“Extortionate” = terms require grossly exorbitant payments or have grossly contravened fair dealing.

Question 24

Distribution of assets under personal insolvency

Answer 24

1. Costs of the bankruptcy. I.e., all the expenses incurred as a result of the bankruptcy.
2. Preferential debts (including secured creditors)
3. Ordinary unsecured creditors
4. Postponed creditors, who are the bankrupt’s spouse or civil partner.

Question 25

What is the effect of discharge of bankruptcy?

Answer 25

 Bankruptcy order is discharged automatically after one year unless discharge is suspended.

 Discharge = the bankruptcy ends, and the bankrupt is released from most of their previous debts.

Question 26

Where bankrupt is unco-operative what happens?

Answer 26

Automatic discharge is suspended.

Question 27

Restrictions on bankrupt people:

Answer 27

1) Credit restrictions – Criminal offence for bankrupt to obtain credit of more than £500 without disclosing their bankruptcy

2) Business restrictions – Cannot act as a director, be involved in management or formation of a company, trade under a different name, continue in partnership, UNLESS the partnership act agreement is varied.

3) Practice as a solicitor without leave from SRA

Question 28

What is a Bankruptcy restriction order (BRO)?

Answer 28

‘Culpable bankrupt’ = someone who have caused their bankruptcy by being dishonest, negligent or reckless.

• Bankruptcy restriction orders (BROs) are designed to protect the public from culpable bankrupts.
• Made by the court and last between 2 and 15 years.
• Instead of going through court proceedings, bankrupt could agree to a bankruptcy restriction undertaking (BRU).

Question 29

What is a debt releif order?

Answer 29

Debtors can apply online for a debt relief order (DRO). DROs are only for debtors whose assets and liabilities are low in value.

 Debtor will be protected from enforcement action by most of their creditors in the same way as bankruptcy and will be free of debt at the end of the DRO period (which is 12 months, unless it is extended because of non-cooperation by the debtor).

 Debtor must cooperate with the Official Receiver, provide them any information they request, pay their creditors if their financial situation improves.

 Same restrictions apply to someone under a DRO as a bankrupt – restrictions may last up to 15 years if the debtor is dishonest or culpable. This extension is obtained by the OR applying for a debt relief restrictions order against the debtor.

Question 30

Who cannot get a debt relief order?

Answer 30

They’re not available if the debtor:

• Has total unsecured liabilities exceeding 30,000
• Has total gross assets exceeding £2,000
• Has a car worth £1,000 or more (unless it has been adapted because the debtor has a disability)
• Has disposable income in excess of £50 per month, after deducting normal household expenditure;
• Has been subject to a DRO in the preceding 6 years; or
• Is subject to another formal insolvency procedure.
• Has their own home.

Question 31

What is debt respite scheme (Breathing space)?

Answer 31

– Gives someone in problem debt the right to legal protection from creditor action.

2 types of breathing space:

1. Standard breathing space.

– Available to any client with problem debt.

– Gives the client legal protection from creditor action for up to 60 days (a moratorium).

– Protection includes pausing most enforcement action and contact from creditors and freezing most interest and charges on their debts.

2. Mental health crisis breathing space.

– Only available to a client who is receiving mental health crisis treatment.

– Lasts as long as the client’s mental health crisis treatment, plus 30 days (no matter how long the crisis treatment lasts).

Question 32

Process to obtain a debt respite?

Answer 32

• Debtor must apply to a debt advice provider authorised by the FCA.
• Debt adviser must be satisfied that the debtor cannot pay some or all of their debt as it falls due.
• The debtor cannot be an undischarged bankrupt and must not be in an IVA or subject to a debt relief order.
• Debtor must not have already had another breathing space in the previous 12 months.
• Debt must be a qualifying debt.

Question 33

For personal insolvency, is HMRC a preferential creditor?

Answer 33

It is a SECONDARY preferetial creditor which means it will be paid after the OR has paid their expenses and any preferential debts, then HMRC is paid.