1. Chapter Six: Bankruptcy 1

2. Bankruptcy is “a legally declared inability or impairment of ability of an individual or organisations to pay their creditors.” Involuntary Bankruptcy: Creditors may file a bankruptcy petition against a debtor in an effort to recoup a portion of what they are owed. Voluntary Bankruptcy: In the majority of cases bankruptcy is initiated by the debtor (that is filed by the bankrupt individual or organisation). 2

3. Bankruptcy Law: Bankruptcy law “provides a plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors.” This supervised division allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to stay in business and use revenue generated to resolve his or her debts. An additional purpose of bankruptcy law is to allow certain debtors to free themselves (to be discharged) of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full. 3

4. Purpose: The primary purpose of bankruptcy is: 1.To give an honest debtor a "fresh start" in life by relieving the debtor of most debts. 1. Bankruptcy allows debtors to be discharged from the legal obligation to pay most debts  by submitting their non-exempt assets, if any, to the jurisdiction of the bankruptcy court for eventual distribution among their creditors. 2.To repay creditors in an orderly manner to the extent that the debtor has the means available for payment. There are two common forms of bankruptcy: liquidation and reorganisation. 4

5. A bankruptcy case is initiated by the filing of a petition, which contains the debtor's financial information. Upon the filing of the bankruptcy petition, the debtor's assets constitute the bankruptcy "estate". A Trustee is appointed to oversee the Debtor's estate, to evaluate claims and perform other functions. First: In a liquidation bankruptcy: The Debtor's nonexempt (i.e. legally unprotected) assets are sold off to satisfy creditor claims. This is referred to as "administering" the Debtor's estate. The Creditors with timely filed and valid claims participate in a pro rata distribution of the proceeds obtained through the liquidation. The distribution is based on a system of priorities, in which certain classes of claimants are given priority over others. 5

6. Second: A reorganisation bankruptcy is a bankruptcy in which a debtor reorganises/restructures assets and debts. Individuals may initiate a reorganisation bankruptcy in order to retain assets and pay creditor claims out of the individual's income. A reorganisation bankruptcy usually allows the Debtor to carry on while satisfying creditor claims. The basic process involves a business reducing each creditor's claims to allow partial payment in order for the business to carry on with its daily commercial activity. Businesses may enter a reorganisation bankruptcy in order to survive insolvency due to creditor claims exceeding the ability of the business to satisfy them. During the tendency of a bankruptcy proceeding the debtor is protected from most non-bankruptcy legal action by creditors. Creditors cannot pursue most types of lawsuits. 6

7. Bankruptcy in the United States: Bankruptcy in the United States is a matter placed under Federal jurisdiction by the United States Constitution allows Congress to enact "uniform laws on the subject of bankruptcies throughout the United States." Its implementation, however, is found in statute law. The relevant statutes are incorporated within the Bankruptcy Code, and amplified by state law in the many places where Federal law either fails to speak or expressly defers to state law. bankruptcy cases, particularly with respect to the validity of claims and exemptions, are often highly dependent upon State law 7

8. Bankruptcy Chapters: The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. In Chapter 7, a debtor surrenders his or her non- exempt property to a bankruptcy trustee who then liquidates the property and distributes the proceeds to the debtor's unsecured creditors. In exchange, the debtor is entitled to a discharge of debt, except that the debtor will not be granted a discharge if he or she is guilty of certain types of inappropriate behaviour (e.g. concealing records relating to financial condition) guilty of certain types of inappropriate behaviour (e.g. concealing records relating to financial condition) and except that some debts (e.g. spousal support, some taxes) will not be discharged even though the debtor is generally discharged from his or her debt. and except that some debts (e.g. spousal support, some taxes) will not be discharged even though the debtor is generally discharged from his or her debt. 8

9. Many individuals in financial distress own only exempt property (e.g. clothes, household goods, an older car) and will not have to surrender any property to the trustee. The amount of property that a debtor may exempt varies from state to state. relief is available only once in any eight year period. Debtors seeking to erase all debts will have to wait eight years from their last bankruptcy before they can file again Generally, the rights of secured creditors to their collateral continues even though their debt is discharged (e.g. absent some arrangement by a debtor to surrender a car or "reaffirm" a debt, the creditor with a security interest in the debtor's car may repossess the car even if the debt to the creditor is discharged). 9

10. Secured creditors may be entitled to greater payment than unsecured creditors. In Chapter 13, the debtor retains ownership and possession of all of his or her assets, but must devote some portion of his or her future income to repaying creditors, generally over a period of three to five years. The amount of payment and the period of the repayment plan depend upon a variety of factors, including the value of the debtor's property and the amount of a debtor's income and expenses. 10

11. There are two basic types of Bankruptcy proceedings. Liquidation: It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors. A trustee is appointed to supervise the asset After a bankruptcy proceeding is filed, creditors may not seek to collect their debts outside of the proceeding. creditors may not seek to collect their debts outside of the proceeding. The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. 11

12. Bankruptcy in the United Kingdom: In British Law: Bankruptcy is “dealing with debts that debtors cannot pay.” It is an option that often has to be considered when an individual cannot pay their debts as they fall due. Bankrupts can make a fresh start, subject to some restrictions. Their assets are shared out fairly among creditors. A first time bankrupt with debts will generally receive their discharge one year after the date of the bankruptcy order. Bankruptcy has a bad stigma and is publicly advertised, it should always be considered when dealing with insolvency cases. Individual Voluntary Arrangement procedure (IVA) can be an alternative to a prospect of bankruptcy. 12

13. Bankruptcy Procedures Bankruptcy Procedures Anyone can go bankrupt, including members of a partnership. There are different insolvency procedures for dealing with companies and for partnerships. An individual can be made bankrupt in one of three ways: 1.Voluntarily - by the debtor themselves. 2.Involuntarily - by the creditor owed money (£750 Minimum). 3.Anyone bound by an IVA A bankruptcy order can still be made even if debtors refuse to acknowledge the proceedings or refuse to agree to them. Debtors should therefore cooperate fully once the bankruptcy proceedings have begun. If they dispute the creditor’s claim, they should try and reach a settlement before the bankruptcy petition is due to be heard. Trying to do so after the bankruptcy order is made is both difficult and expensive. 13

14. Bankruptcy Process: a court makes a bankruptcy order only after a bankruptcy petition has been presented. Bankruptcy Process: a court makes a bankruptcy order only after a bankruptcy petition has been presented. The Court Fees: There are three fees debtors may have to pay: 1.The Court fee of £120: in some circumstances the court may waive this fee; for example, if the debtor is on Income Support. 2.The deposit of £250 towards the costs of administering debtor's bankruptcy. 3.The fee to swear the statement of affairs. (Pleadings that the debtor files with the Bankruptcy Court Clerk that contains information about his or her financial transactions and status.) If the debtors are married couple and they are both applying for bankruptcy, they will each have to pay separate fees. If they were in business as a partnership, each partner will have to pay separate fees, unless all the parties apply for a joint bankruptcy petition. 14

15. Where is the Bankruptcy Order Made? Bankruptcy petitions are usually presented either at the High Court in London or a County Court near to where debtors live or trade. A petition can be presented against a debtor even if he is not present in England or Wales at that time, providing he normally lives in, or has a recent residential or business connection with. The address and telephone number of his local County Court is listed under 'Courts' in the phone book, where he should look for ‘civil Courts - County Courts at: www.courtservice.gov.uk. However, he will need to contact the Court to find out if it has jurisdiction to hear a bankruptcy case. www.courtservice.gov.uk The Court will either hear the petition straight away or arrange a time for the Court to consider it. 15

16. What will happen at Court? At the hearing the Court can do one of four things: 1.Delay the proceedings - often because the Court needs further information before it can decide whether to make a bankruptcy order. 2.Dismiss the petition - perhaps because an administration order would be more appropriate. 3.Appoint an Insolvency Practitioner - if the Court thinks that an Individual Voluntary Arrangement IVA would be more appropriate. debtor has not been bankrupt or made an IVA in the previous five years. 4.Make a bankruptcy order. A debtor will be bankrupt the moment the order is made by the Court. The Court may issue a certificate of summary administration – if the debtor unsecured debts are less than £20,000 and in the previous five years he has not been bankrupt or made an IVA with his creditors. This certificate will make the administration of the debtor bankruptcy quicker The Official Receiver will then be the debtor Trustee in bankruptcy and the debtor will automatically be freed from bankruptcy ('discharged') two years from the date of the bankruptcy order. 3 years if a certificate of summary administration is not made, 16

17. The Duties of a Trustee: The Official Receiver, is a civil servant and an officer of the Court. He is responsible for administering bankruptcies and will act as a Trustee of the debtor estate unless a private sector Insolvency Practitioner is appointed. The Official Receiver’s main duties is to investigate the debtor financial affairs for the time before and during his bankruptcy. An Insolvency Practitioner can be appointed as a Trustee. They must be licensed, usually accountants or solicitors, then responsible for the disposing of debtor's assets and making payments to his creditors. 17

18. The Duties of a Bankrupt: 1.When a bankruptcy order has been made, a bankrupt must provide the Official Receiver with information relating to his financial affairs within 21 days. 2.Any assets are then to be handed over to the Official Receiver along with any bank statements and insurance policies relating to debtor's property and financial affairs. 3.Any assets and income increases obtained during the bankruptcy should be declared to the Trustee. 4.The debtor must not obtain credit of £250 or more from any person without first disclosing the fact that he is bankrupt. 5.Any bank or building society accounts must no longer be used. 6.The debtor must not make any direct payments to his creditors. 7.The debtor may also have to attend Court to explain why he is in debt. If the debtor does not cooperate, he could be arrested. 18

19. Disadvantages of Bankruptcy: Bankrupt can have disastrous long-term implications 1. Once the debtor has been made bankrupt, all assets belonging to him come under the control of the Trustee, including his home. 1. Once the debtor has been made bankrupt, all assets belonging to him come under the control of the Trustee, including his home. 2. Restrictions placed upon the bankrupt and the stigma of having to declare oneself as a bankrupt for certain transactions. 2. Restrictions placed upon the bankrupt and the stigma of having to declare oneself as a bankrupt for certain transactions. 3. Any business he owns immediately closed. 3. Any business he owns immediately closed. 4. Lose any assets of real value including his home, life insurance and possibly pensions 4. Lose any assets of real value including his home, life insurance and possibly pensions 5. Loses any assets he may acquire during his bankruptcy such as inheritances, insurance settlements, growth of asset value in his home. 5. Loses any assets he may acquire during his bankruptcy such as inheritances, insurance settlements, growth of asset value in his home. 6. Have all bank accounts, credit cards etc. closed. Anything he might be leasing, or buying on hire purchase, such as his car will be immediately returned to the owner. 6. Have all bank accounts, credit cards etc. closed. Anything he might be leasing, or buying on hire purchase, such as his car will be immediately returned to the owner. 19

20. 7. Lose professional and business status. A bankrupt may not conduct business directly or indirectly in any name. 7. Lose professional and business status. A bankrupt may not conduct business directly or indirectly in any name. 8. Cannot take any part in the promotion, formation or management of a company without the permission of the court. 8. Cannot take any part in the promotion, formation or management of a company without the permission of the court. 9. May not become a member of parliament. 9. May not become a member of parliament. 10. May not become a member of the local authority. 10. May not become a member of the local authority. 11. Their credit is affected for many years after the annulment. 11. Their credit is affected for many years after the annulment. A bankrupt may open a new bank or building society account but should disclose the fact that they are bankrupt. The bank or building society may then impose conditions and limitations. A bankrupt may open a new bank or building society account but should disclose the fact that they are bankrupt. The bank or building society may then impose conditions and limitations. The bankrupt must inform the Trustee of any funds available in the account, which exceed the normal living expenses, in order for the Trustee to distribute among the creditors. The bankrupt must inform the Trustee of any funds available in the account, which exceed the normal living expenses, in order for the Trustee to distribute among the creditors. 20

21. The Alternatives to Bankruptcy: Informal arrangement – Debtor could consider writing to all his creditors to see if he can reach a compromise. Include a timetable of when he will repay them. Individual voluntary arrangement (IVA)- This is a formal version of the previously described arrangement. Debtor would need to apply to the court with the help of an authorised insolvency practitioner. He or she would supervise the arrangement and pay the creditors in line with the accepted proposals. Individual voluntary arrangement (IVA)- This is a formal version of the previously described arrangement. Debtor would need to apply to the court with the help of an authorised insolvency practitioner. He or she would supervise the arrangement and pay the creditors in line with the accepted proposals. Proposals to creditors can be based on offer or regular monthly payments. If 75% (in value of debt) of those creditors who vote agree, then the arrangement is legally binding on all concerned. Proposals to creditors can be based on offer or regular monthly payments. If 75% (in value of debt) of those creditors who vote agree, then the arrangement is legally binding on all concerned. Regular payment normally last for between three and five years. An IVA may safeguard the debtor property to a certain extent. Regular payment normally last for between three and five years. An IVA may safeguard the debtor property to a certain extent. 21

22. Administration orders - If one or more creditors has a court judgment against the debtor and the total debts are £5,000 or less, the county court could make an administration order. Under the administration order, the debtor makes regular payments to the court, which will then pay the creditors. While the debtor is paying the administration order, his creditors can't take any further action against him to get their money, without asking the court first. While the debtor is paying the administration order, his creditors can't take any further action against him to get their money, without asking the court first. Also, the debtor will not have to pay any interest on his debts. Also, the debtor will not have to pay any interest on his debts. He will have to pay a fee for an administration order, but this will be added to the money he already owe and not charged separately. He will have to pay a fee for an administration order, but this will be added to the money he already owe and not charged separately. 22

23. How long does Bankruptcy last? A bankrupt may be discharged (freed from obligations under the bankruptcy order) after one year. Discharge is not necessarily automatic and can be postponed by the Court. Discharge releases the bankrupt from most of the debts owed at the date of the bankruptcy order. Exceptions include debts arising from fraud, certain crimes and fines. Certain other debts such as damages or personal injury or money owed under family proceedings will be released only if the Court agrees. Exceptions include debts arising from fraud, certain crimes and fines. Certain other debts such as damages or personal injury or money owed under family proceedings will be released only if the Court agrees. If the bankrupt has been declared bankrupt before, within the last 15 years, he will not be automatically discharged. He will only be able to apply to the Court for a discharge 5 years after the date of his current bankruptcy order. After discharge, any assets that are acquired may usually be kept. 23

24. Bankrupt Again? Bankruptcy deals with debts at the date of the bankruptcy order. After that date a bankrupt should manage his finances more carefully. However, if he then incurs new debts, this could result in a further bankruptcy order even before he is discharged from the first bankruptcy, which may have more serious consequences such as, prosecution, if the debts were obtained without disclosing his bankruptcy. 24

25. Can Bankruptcy Be Reversed or Cancelled? Procedures which cancel a bankruptcy order of annulment can only be made by the court. Bankrupts can apply for a reversal or annulment at any time if: 1.The bankruptcy order should not have been made, for example because the proper steps involved in obtaining the order were not followed; or 2.All bankruptcy debts and the fees and expenses of the bankruptcy proceedings have been either paid in full or guaranteed to the satisfaction of the court; or 3.Bankrupt has reached an agreement called an Individual Voluntary Arrangement with his creditors to repay all or part of his debts. 25