Bankruptcy

Question 1

What is bankruptcy?

Answer 1

• 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.

Question 2

What is the procedure before making a bankruptcy order?

Answer 2

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

Question 3

What is the procedure following a bankruptcy order?

Answer 3

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

Question 4

What happens to the bankrupts property following a bankruptcy order?

Answer 4

• 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)

Question 5

What happens to the bankrupts income following a bankruptcy order?

Answer 5

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

Question 6

What happens to the bankrupts home - immediate sale?

Answer 6

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

Question 7

What happens to the bankrupts home - shared interest?

Answer 7

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

Question 8

What happens to the bankrupts home - delayed sale?

Answer 8

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

Question 9

What happens to the bankrupts home - Security for loans?

Answer 9

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

Question 10

What is an Official Receiver (OR)?

Answer 10

• 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

Question 11

What is the role of a Trustee in Bankruptcy?

Answer 11

• 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

Question 12

What are the priority for payment rules?

Answer 12

Secured creditors first (who, because of their security can choose not to participate in the bankruptcy)

If any assets left then,

1. The expenses, fees and costs of the OR/TIB
2. Preferential debts (pension scheme contributions and up to four months wages owing to employees (£800 cap) including holiday pay (no cap)
3. Any creditor holding a floating charge over an asset
4. Unsecured creditors and other debts (wages above cap, tax)
5. Interest due on all debts since the BRO
6. 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

Question 13

Who is a secured creditor?

Answer 13

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)

Question 14

Name some restrictions for a individual who is subject to bankruptcy order?

Answer 14

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).

Question 15

In addition to disclosing all their assets to the TIB the bankrupt must not:

Answer 15

 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).

Question 16

What happens to transactions prior to bankruptcy if sold undervalue?

Answer 16

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

Question 17

Transactions prior to bankruptcy - preferences

Answer 17

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

Question 18

Transactions prior to bankruptcy - Transactions defrauding creditors

Answer 18

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

Question 19

What happens when bankrupt is discharged from bankruptcy?

Answer 19

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

Question 20

What is a bankruptcy restriction order (BRO) and undertakings (BRU)?

Answer 20

• 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

Question 21

The Effects of Bankruptcy on Investments

Answer 21

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.

Question 22

The Effects of Bankruptcy on Life Assurance policies NOT written in trust

Answer 22

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.

Question 23

The Effects of Bankruptcy on Life Assurance policies written in trust

Answer 23

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).

Question 24

The Effects of Bankruptcy on a policy under the Married Women’s Property Act 1882 (MWPA)

Answer 24

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.

Question 25

The Effects of Bankruptcy on pensions - pre 29 May 2000

Answer 25

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.

Question 26

The Effects of Bankruptcy on pensions - post 29 May 2000

Answer 26

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.

Question 27

The Effects of Bankruptcy on trusts (settlor)

Answer 27

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

Question 28

The Effects of Bankruptcy on trusts (trustee)

Answer 28

No effect on trust property; * May bring into question trustee’s suitability * May wish to remove them * Bankrupt cannot be a charitable trustee

Question 29

The Effects of Bankruptcy on trusts (beneficiary)

Answer 29

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

Question 30

Alternatives to Bankruptcy - Individual Voluntary Arrangement (IVA)

Answer 30

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.

Question 31

Alternatives to Bankruptcy - Deeds of arrangement

Answer 31

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

Question 32

Alternatives to Bankruptcy - Debt relief order (DRO)

Answer 32

- 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

Question 33

Alternatives to Bankruptcy - administration order

Answer 33

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