Personal Insolvency Flashcards
(24 cards)
When is an individual insolvent?
When:
- A debt is payable now, but the debtor does not currently have enough money to pay; or
- A debt is payable in the future and there is no reasonable prospect that the individual will be able to pay
What are the 3 ways in which a creditor can prove that a individual is insolvent?
1) Serving a statutory demand on the debtor for a liquidated sum of £5000 or more and waiting 3 weeks to see if they pay or apply to court to set aside the statutory demand
2) Serving a statutory demand on the debtor for a future liability to pay a debt of £5000 or more and waiting 3 weeks to see whether they are either:
- Show a reasonable prospect of being able to pay the sum when it falls due; or
- Applies to court to set aside the statutory demand
3) By obtaining a court judgment for a debt of £5000 or more and attempting execution of the judgment without success
What options might an insolvent individual have?
Debtor can try to reach agreement with creditors or apply for their own bankruptcy
They could enter an individual voluntary arrangement or apply for a debt relief order
What is bankruptcy?
Process where the debtor’s assets pass to a trustee in bankruptcy, whose job it is to pay as many debts as possible to creditors
Debtor is known as the bankrupt and they are subject to restrictions on activities and spending during the process
After 1 year, the bankrupt is discharged, meaning the bankruptcy ends and they are free of almost all debts
Student loans must be paid in full, even after bankrupt has been discharged
A bankruptcy petition could be brought by a creditor or the individual debtor themselves.
How does a creditor bring a petition?
Creditor can bring petition at court if they are owed £5000 or more for a fixed sum, rather than for unspecified damages etc
- Debtor must be unable to pay or have little prospect of doing so
Multiple creditors owed less than £5000 separately but over £5000 together can make a joint petition
Creditors must pay a deposit to meet the costs of the trustee in bankruptcy and the court fee
Petition is personally served on debtor
How does the debtor bring a bankruptcy petition?
Must apply online and pay the application fee and a deposit towards the OR’s administrative fees
An adjudicator, working for Insolvency Service, decides whether to make the order, based on if debtor is unable to pay their debts, within 28 days of application
The Official Receiver acts as the trustee in bankruptcy and takes control of bankrupt’s assets. Give some more details about what this means
The OR will get the debtor’s statement of affairs, which details their financial position and recent transactions
They will protect the debtor’s property and sell anything perishable or decreasing in value
Estate vests automatically in OR when bankruptcy order is made
- Where necessary, they sell assets and use proceeds to pay the creditors
What property is the bankrupt allowed to keep?
Bankrupt can keep assets needed for day-to-day living
They are entitled to be paid their salary, but if they get more than what is needed to meet their reasonable needs, the trustee might ask them to enter an income payments agreement (IPA)
- They would pay some of their salary to the trustee to meet their liabilities
- If they can’t agree, the trustee can apply for an income payments order (IPO) and let the court decide the maximum payable
- IPA and IPO last a max of 3 years
If the bankrupt is a homeowner, what happens to their home during bankruptcy?
If they are a homeowner, the interest passes to the trustee
If someone else has a legal or equitable interest in the house or right of occupation, the bankrupt cannot be evicted right away and the trustee needs a court order to sell
After 1 year of bankruptcy, the creditors’ interests outweigh everyone else’s unless circumstances are ‘exceptional,’ so the trustee will probably obtain an order for sale
After 3 years of bankruptcy, ownership of home transfers back to bankrupt, unless it has been sold, trustee has applied for an order of sale or trustee entered into an an agreement with bankrupt
The trustee’s primary duty is to the creditors, as their aim is to pay as many debts as possible.
In order to do so, they try to preserve and increasing the bankrupt’s assets. What claims can they make to achieve this?
Trustee’s primary duty is to the creditors, and they can challenge past transactions to increase assets available to repay creditors
Following an investigation into the bankrupt’s affairs, the trustee can:
- (a) disclaim onerous property;
- (b) apply to set aside transactions at an undervalue;
- (c) apply to set aside preferences;
- (d) apply to set aside transactions defrauding creditors (Same process as for corporate insolvency); and
- (e) avoid extortionate credit transactions
What is the claim to disclaim onerous property?
Trustee may disclaim, for example, unprofitable contracts, land that has the burden of an onerous covenant or a lease which has no capital value to be realised for creditor benefit
The disclaimer means that the bankrupt’s rights and liabilities in the onerous property come to an end and the trustee is discharged from personal responsibility for the property
Anyone suffering loss because of the disclaimer, can claim as an unsecured creditor
What is the claim to challenge transactions at an undervalue?
Undervalue is either a gift or transaction where the bankrupt received consideration significantly lower in value than what they provided
Trustee can investigate transactions during the 5 years prior to bankruptcy petition
- No need to show insolvency at time, unless it was more than 2 years ago
- If with an associate (close relative or business associate), rebuttable presumption that the bankrupt was insolvent, even if more than 2 years ago
What is the claim to challenge a transaction with preferences?
Rebuttable presumption of intention to prefer if the preference is in favour of an associate
Trustee can challenge any potential preferences within 6 months of presentation of bankruptcy petition or within 2 years before if preference is in favour of an associate
Bankrupt must have been insolvent at time or because of preference
What is the claim to challenge extortionate credit transactions?
Trustee can apply to set aside or vary the terms of any credit obtained in 3 years prior, where the terms are extortionate
Extortionate = grossly exorbitant payments or terms grossly contravene fair dealing
- Rare to prove
As with corporate insolvency, there is a set statutory order to the distribution of assets in bankruptcy. What is this order?
Secured creditors can sell charged assets and take what they are owed
- If surplus, goes to trustee
- If shortfall, they become unsecured creditor for the remainder
Once all assets realised and transactions challenged, assets distributed in the following order:
- Costs of the bankruptcy – trustees fees
- Preferential debts
- Ordinary unsecured creditors
- Postponed creditors – bankrupt’s spouse or civil partner
Creditors in each category rank and abate equally, so they will receive the same percentage of the debt owed to them
What are preferential debts?
Include the salaries of employees for work carried out in 4 months prior to date of employer’s bankruptcy, up to a maximum of £800 + accrued holiday pay
HMRC is a secondary preferential creditor for tax owed to it (PAYE + VAT)
When is bankruptcy discharged?
Bankruptcy order is discharged automatically after 1 year, unless discharge is suspended
- They are free from most previous debts, but may be subject to restrictions
Property which was vested in trustee does not return to the bankrupt, except their home in some cases
As soon as the bankruptcy order is made, the bankrupt is subject to some restrictions.
What business restrictions will apply to the bankrupt?
They can keep items needed for work (tools of trade) and a vehicle if essential for work
Criminal offence to obtain credit of more than £500 without disclosing their bankruptcy
They also cannot:
- Act as a company director
- Be involved in management, promotion or formation of a company, without court permission
- Trade under a different name without disclosing that they are an undischarged bankrupt
- Continue in partnership, unless partnership agreement varies from default position (automatically cease under PA)
What personal restrictions will apply to the bankrupt?
Criminal offence to obtain credit of more than £500 without disclosing their bankruptcy, so they cannot get a credit card or have a current account with an overdraft
Cannot practice as a solicitor without leave of SRA
What are bankruptcy restriction orders (BROs) and bankruptcy restriction undertakings (BRUs)?
BROs are for ‘culpable’ bankrupts who caused their own bankruptcy through dishonesty, negligence or recklessness
- Made by court and last between 2 and 15 years
The bankrupt might agree to a bankruptcy restriction undertaking (BRU) which has the same effect
If subject to either, they cannot act as a company director for the length of it or obtain credit over £500 without disclosing the BRO
There are various alternatives to bankruptcy.
What is an individual voluntary arrangement (IVA)?
Binding agreement between unsecured creditors, setting out how much each creditor will receive from the bankrupt in settlement of their debts
Insolvency practitioner is known as the debtor’s nominee
Once the nominee is appointed, the debtor prepares a statement of affairs for them and they apply to the court for a moratorium (usually lasts 14 days)
Nominee then prepares a report for court stating whether the debtor has put forward any realistic proposals and whether they are prepared to support the calling of a creditor’s decision-making process
If this process happens and 75% or more of the creditors in value of which at least 50% in value are not associates of the debtor agree to the proposals, they will be approved
- Not binding on preferential or secured creditors unless they specifically agree to it
- The nominee becomes a supervisor and implements the proposals
Creditor advantages - More straightforward process and may offer the creditors greater returns than bankruptcy, but the debtor must be trusted to honour the proposals
Debtor advantages - Avoids the disqualifications and stigma of a bankruptcy
How does negotiation with creditors act as an alternative to bankruptcy?
Helpful to discuss with creditors, but won’t prevent the creditor bringing a bankruptcy petition
What is a debt relief order (DRO) and how does it work as an alternative to bankruptcy?
Can apply online if the debtor has assets and liabilities which are low in value
Not available if:
- (a) has total unsecured liabilities exceeding £50,000
- (b) has total gross assets exceeding £2,000;
- (c) has a car worth £4,000 or more, unless it has been adapted because the debtor has a disability
- (d) has disposable income in excess of £75 per month, after deducting normal household expenditure;
- (e) has been subject to a DRO in the preceding 6 years; or
- (f) is subject to another, formal insolvency procedure
OR makes the order and debtor will be protected from enforcement action and likely debt free at the end of the 12-month DRO period
- Same restrictions apply as during bankruptcy and may extend beyond
What is the debt respite scheme or ‘breathing space’ and how does it work as an alternative to bankruptcy?
2 types of breathing space; standard and mental health crisis breathing space
1) Standard – available to any person with problem debt and gives them legal protection from creditor action for up to 60 days
- Pauses enforcement action and contact from creditors
2) Mental health crisis – only available to a person receiving mental health crisis treatment
- Lasts as long as the treatment + 30 days
Debtor must apply to an FCA authorised debt advice provider
- They must be satisfied that the debtor cannot pay some or all their debts as they fall due
- Cannot be an undischarged bankrupt and must not be in IVA or subject to a DRO, nor have had a BS in the last 12 months
