Insolvency Made Clear: A Guide for Debtors

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Chapter 2 Effect of bankruptcy This chapter is about what happens when someone goes bankrupt. Most of this book assumes the debtor wishes to contest the bankruptcy petition. This, and the next chapter, discuss whether that is a sensible decision or whether bankruptcy is a better outcome. Box 4: PRE-BANKRUPTCY People are not suddenly made bankrupt. Where an individual is made bankrupt on the request of their creditors, the individual is likely to have had a debt for several months and the creditor would have written to ask for repayment on multiple occasions. Then the creditor will issue a ‘statutory demand’ (see Chapter 4) which is a formal step demanding repayment within 21 days, and which permits the issuing of a bankruptcy petition. The court will then have a hearing to determine that the conditions for making a bankruptcy order are met (see Chapter 5). If they are, the court will make a bankruptcy order. There is typically at least four months between the statutory demand and the first hearing of the bankruptcy petition. 2.1 Stages of bankruptcy Shortly after the bankruptcy order is made, the bankrupt will be contacted by their ‘Trustee in Bankruptcy’. The Trustee is the person who will be in charge of administrating the bankruptcy. They must be an independent, regulated Insolvency Practitioner. The Trustee will likely be the Official Receiver, a civil servant working for the Department for Business, Energy and Industrial Strategy. However, the bankrupt’s creditors will be able to decide whether to appoint a private practitioner to be the Trustee in Bankruptcy to replace the Official Receiver. The Insolvency Service has an internal target of 20 days to complete the first interview of the bankrupt following a bankruptcy order made by a creditor’s petition. In practice, they may be a few days slower. 13
Insolvency Law Made Clear – A Guide For Debtors The role of the Trustee is, under s305 of the Act, to ‘get in and realise (i.e. sell) the estate of the bankrupt’. It is helpful to discuss the estate of the bankrupt and the process of ‘realising’ it separately. 2.2 The estate of the bankrupt The ‘estate’ of the bankrupt is the property which a Trustee in Bankruptcy is entitled to sell. The definition of ‘property’ is very wide, and it includes property held overseas, shares, and goodwill of the bankrupt’s business. The property of the estate automatically ‘vests’ (i.e. belongs) to the Trustee. The role of the Trustee is to sell that property to distribute the proceeds to the creditors. To give an example: before a debtor becomes bankrupt, they have unrestricted access to their own bank account. After the bankruptcy order is made, the Trustee is entitled to make payments out of that account, and the bankrupt is no longer able to. It is contempt of court not to deliver up to the Trustee all the property, books and records which they are required to take control of: see s312 of the Act. A bankrupt is not allowed to sell property they once held without the permission of the Trustee. One of the first acts of the Trustee is likely to be to contact all the bankrupt’s banks to request that no further transactions take place from the account without their permission, or to transfer the money into a separate account controlled by the Trustee. 2.2.1 Exceptions Not all property which belongs to the bankrupt gets automatically transferred to the Trustee. Most of it does. The only property which does not get transferred to the Trustee is set out in s283(2) of the Insolvency Act: • such tools, books, vehicles and other items of equipment as are necessary to the bankrupt for use personally by them in their employment, business or vocation; • such clothing, bedding, furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and their family. The first exception means that if the bankrupt is, for example, a builder then they can keep the main items of equipment needed for their job such as a vehicle with a large boot or a valuable collection of drills. This exception is limited because the Trustee has the power to replace an expensive item with a less expensive item which will perform a similar purpose. To give an extreme example, if the Trustee decides that the bankrupt does not need a Jaguar car, but can perform their job with a Skoda, then the Trustee can sell the expensive car, buy the cheaper one, and distribute any profit to the creditors. In practice, a Trustee 14
Page 1 and 2: INSOLVENCY LAW MADE CLEAR A GUIDE F
Page 3 and 4: Published June 2021 ISBN 978-1-9163
Page 6: Acknowledgments I owe special thank
Page 9 and 10: Insolvency Law Made Clear - A Guide
Page 20 and 21: Preface: the effects of the pandemi
Page 22 and 23: Legal terms defined ‘The Act’:
Page 24 and 25: Legal Terms Defined A ‘dispositio
Page 26 and 27: Legal Terms Defined a bankruptcy or
Page 28 and 29: Legal Terms Defined A ‘third part
Page 30 and 31: Introduction and aim of this book T
Page 32 and 33: Introduction And Aim Of This Book A
Page 34: Part 1 BANKRUPTCY The next few chap
Page 48 and 49: Effect Of Bankruptcy will only choo
Page 50 and 51: Effect Of Bankruptcy Box 5: HOW MUC
Page 52 and 53: Effect Of Bankruptcy by giving noti
Page 54 and 55: Effect Of Bankruptcy the seller goe
Page 56 and 57: Effect Of Bankruptcy The judge held
Page 58 and 59: Effect Of Bankruptcy Finally, the f
Page 60 and 61: Effect Of Bankruptcy to have an awk
Page 62 and 63: Effect Of Bankruptcy 2.10 Running t
Page 64 and 65: Effect Of Bankruptcy although it is
Page 66 and 67: Effect Of Bankruptcy either volunta
Page 68 and 69: Effect Of Bankruptcy 2.16 Investiga
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