What is bankruptcy?

What is bankruptcy?

Bankruptcy is a formal individual insolvency procedure governed by Part IX of the Insolvency Act 1986 (“IA 1986”).

The purpose of bankruptcy is to grant relief to the bankrupt and fairly distribute their asset realisations among their unsecured creditors.

The features of bankruptcy are:

  • The bankrupt’s assets and property form their bankruptcy estate, which vests in their trustee in bankruptcy (“TIB”) on appointment.
  • The TIB can be either the Official Receiver (OR) or an insolvency practitioner (IP).
  • The TIB administers the bankrupt’s estate and seeks to realise the value of the assets for distribution pari passu among the bankruptcy creditors after costs.
  • It is a collective remedy. The bankruptcy creditors are generally bound to accept their distribution in settlement of their bankruptcy debts and are prevented from taking further recovery or enforcement action against the debtor and their property without court permission.
  • Every bankruptcy is under the general control of the court: the court has wide powers to decide all questions, whether of law or fact (and not limited to those conferred expressly by the legislation).
  • An individual debtor must apply online to the adjudicator for a bankruptcy order.
  • Creditors and other parties must present a bankruptcy petition at the court.
  • Bankruptcy commences on the date stated in the bankruptcy order and continues until the debtor is discharged; usually on the first anniversary of the bankruptcy order.
  • The TIB’s administration of the bankrupt’s estate often continues beyond the debtor’s discharge. 
Who can petition the court to make a debtor bankrupt?

The following parties may present a bankruptcy petition to the court for a bankruptcy order to be made against an individual debtor:

  • One or more of the debtor’s creditors (see Creditor’s bankruptcy petition: process).
  • The supervisor or creditor of the debtor’s failed IVA.
  • A temporary administrator or liquidator appointed in another EC member state.

Petitioners must present their petition to the debtor’s local court. 

A creditor (or creditors acting together) can only present a bankruptcy petition to the court if, at the time the petition is presented all of the following apply:

  • The debt (or minimum total debts) equals or exceeds the bankruptcy level: currently £5,000.
  • The debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor(s) either immediately or at some certain future time and is unsecured.
  • The debtor appears either to be unable or to have no reasonable prospect of being able to pay.
  • There is no outstanding application to set aside a statutory demand served in respect of the debt (or any of the debts).

Although ultimately a question of fact, a court will presume that a debtor cannot pay their debts if the debtor fails to satisfy a statutory demand served on him by the creditor.  

Can I declare myself bankrupt?

Since 6 April 2016, debtors no longer petition the court for their bankruptcy order. Instead, debtors apply online to the adjudicator. If a debtor’s application provides all the prescribed information, and is considered appropriate, the adjudicator will make a bankruptcy order.

Although the adjudication process is an administrative process, the bankruptcy order has the same statutory force under the IA 1986. The procedure removes the courts from the mechanics of making a debtor’s bankruptcy order. However, the courts retain their general jurisdiction over bankruptcy proceedings commenced by the adjudicator’s bankruptcy order, and will also hear any appeals from the adjudicator’s decision to refuse to make a bankruptcy order.

 When does a bankruptcy end?

A debtor is automatically discharged from bankruptcy on the first anniversary of becoming bankrupt. The discharge of a debtor from bankruptcy does not end the process of asset realisation and distribution by the TIB.

The TIB remains in office for the purpose of completing the realisation of the assets within the insolvent estate. Any creditor owed a bankruptcy debt by the debtor may therefore still claim their share of the asset realisations available for distribution after the debtor’s discharge. 

The OR and the TIB can apply to court to suspend automatic discharge if the bankrupt has failed to comply with their duties under the IA 1986 in the course of the bankruptcy to date.

For advice please contact our Bankruptcy & Insolvency team on 0345 20 73 72 8 or email info@thursfields.co.uk

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