Insolvency Made Clear: A Guide for Debtors

Effect Of Bankruptcy
either voluntarily with written agreement of the bankrupt and the Trustee/OR,
or by order of the court (s310A(6)).
2.14 Distribution to creditors
Once the Trustee has gathered funds, they will then make a distribution to creditors.
The distribution must follow the statutory regime, which in outline is:
• First, secured creditors will be paid. This includes mortgages, which are
loans secured on the house. If the sale of the security does not cover the
whole amount owed to the creditor, the remaining part is treated like an
unsecured debt.
• Second, bankruptcy expenses of the Trustee in Bankruptcy (see r10.149).
This includes the Trustee’s fees; any expenses they spent on contesting debts;
the costs of running the bankrupt’s business if the Trustee chooses to do
so; and the costs of the petitioner’s petition which the court allowed. The
significance of this, from the bankrupt’s perspective, is that the Trustee
is likely to be relatively assured of having their fees paid and so, unlike
unsecured creditors, is unlikely to be put off from lengthy negotiation and
correspondence.
• Third, preferential debts, which typically refers to unpaid wages, redundancy
pay if the bankrupt had employees and certain taxes to HMRC.
• Fourth, ordinary unsecured creditors.
• Fifth, interest on any debt, which will accrue at 8% since the date of the
bankruptcy order.
• Sixth, debts to the bankrupt’s spouse.
• Finally, any surplus remaining will go to the bankrupt themselves.
If there is not enough to pay all the debts in the category, the amount which
remains will be divided equally within the category. For example, if the estate
is worth £10,000, the Trustee’s expenses come to £5,000, there are no preferential
debts and there are unsecured debts of £50,000, the Trustee would be paid
in full, and the unsecured creditors would each share the remaining £5,000:
i.e. for each £1 of debt they are owed, they would receive 10p. A Trustee may
discover that the individual has so few assets that it is not worth making a distribution
at all.
A bankrupt may have borrowed money from their own family. Family members
will be treated as unsecured creditors – in particular, the family members
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