Bankruptcy in the United Kingdom (in a strict legal sense) relates only to individuals (including
sole proprietors) and
partnerships. Companies and other
corporations enter into differently named legal insolvency procedures:
liquidation and
administration (
administration order and
administrative receivership).
However, the term 'bankruptcy' is often used when referring to
companies in the media and in general conversation. Bankruptcy in
Scotland is referred to as
sequestration. To apply for bankruptcy in Scotland, an individual must have more than £1500 of debt.
A
trustee in bankruptcy must be either an
Official Receiver (a civil servant) or a licensed
insolvency practitioner. Current law in England and Wales derives in large part from the
Insolvency Act 1986. Following the introduction of the
Enterprise Act 2002,
a UK bankruptcy will now normally last no longer than 12 months and may
be less, if the Official Receiver files in court a certificate that his
investigations are complete. It was expected that the UK Government's
liberalisation of the UK bankruptcy regime would increase the number of
bankruptcy cases; initially cases increased, as the Insolvency Service
statistics appear to bear out. Since 2009, the introduction of the
Debt Relief Order
has resulted in a dramatic fall in bankruptcies, the latest estimates
for year 2014/15 being significantly less than 30,000 cases.
UK Bankruptcy statistics
| Year |
Bankruptcies |
IVAs |
Total |
| 2004 |
35,989 |
10,752 |
46,741 |
| 2005 |
47,291 |
20,293 |
67,584 |
| 2006 |
62,956 |
44,332 |
107,288 |
| 2007 |
64,480 |
42,165 |
106,645 |
| 2008 |
67,428 |
39,116 |
106,544 |
- Pensions
The UK bankruptcy law was changed in May 2000, effective May 29, 2000.
[28] Debtors may now retain occupational
pensions while in bankruptcy, except in rare cases.
[28]
- Proposed reform
The Government have updated legislation (2016) to streamline the
application process for UK bankruptcy. UK residents now need to apply
online for bankruptcy - there is an upront fee of £655. The process for
residents of Northern Ireland differs - applicants must follow the older
process of applying through the courts.
[29]
United States
Bankruptcy in the United States is a matter placed under
federal jurisdiction by the
United States Constitution (in Article 1, Section 8, Clause 4), which empowers
Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States". The Congress has enacted
statutes governing bankruptcy, primarily in the form of the Bankruptcy Code, located at Title 11 of the
United States Code. Federal law is amplified by state law in some places where Federal law fails to speak or expressly defers to state law.
While bankruptcy cases are always filed in
United States Bankruptcy Court (an adjunct to the
U.S. District Courts),
bankruptcy cases, particularly with respect to the validity of claims
and exemptions, are often dependent upon State law. One example: two
states, Maryland and Virginia, which are adjoining states, have
different personal exemption amounts that cannot be seized for payment
of debts. This amount is the first $6,000 in property or cash in
Maryland, but only the first $5,000 in Virginia. State law therefore
plays a major role in many bankruptcy cases, and it is often not
possible to generalize bankruptcy law across state lines.
Generally, a debtor declares bankruptcy to obtain relief from debt,
and this is accomplished either through a discharge of the debt or
through a restructuring of the debt. Generally, when a debtor files a
voluntary petition, his or her bankruptcy case commences.
- Chapters
There are six types of bankruptcy under the
Bankruptcy Code, located at Title 11 of the
United States Code:
- Chapter 7:
basic liquidation for individuals and businesses; also known as
straight bankruptcy; it is the simplest and quickest form of bankruptcy
available
- Chapter 9: municipal bankruptcy; a federal mechanism for the resolution of municipal debts
- Chapter 11:
rehabilitation or reorganization, used primarily by business debtors,
but sometimes by individuals with substantial debts and assets; known as
corporate bankruptcy, it is a form of corporate financial
reorganisation which typically allows companies to continue to function
while they follow debt repayment plans
- Chapter 12: rehabilitation for family farmers and fishermen;
- Chapter 13:
rehabilitation with a payment plan for individuals with a regular
source of income; enables individuals with regular income to develop a
plan to repay all or part of their debts; also known as Wage Earner
Bankruptcy
- Chapter 15:
ancillary and other international cases; provides a mechanism for
dealing with bankruptcy debtors and helps foreign debtors to clear
debts.
The most common types of
personal bankruptcy
for individuals are Chapter 7 and Chapter 13. Whether a person
qualifies for Chapter 7 or Chapter 13 is in part determined by income.
[30]
As much as 65% of all U.S. consumer bankruptcy filings are Chapter 7
cases. Corporations and other business forms file under Chapters 7 or
11. Often called "straight bankruptcy" or "simple bankruptcy," it allows
consumers to eliminate just about all of their debts over a period of
three or four months. Typically, the only debts that survive a Chapter 7
are
student loans,
child support
obligations, some tax bills and criminal fines. Credit cards, pay day
loans, personal loans, medical bills, and just about all other bills are
discharged.
Ninety-one percent of U.S. individuals who enter bankruptcy hire an attorney to file their Chapter 7 petitions.
[31] The typical cost of an attorney is $1,170.00.
[31]
Alternatives to filing with an attorney are: filing pro se (that is,
without an attorney, which requires an individual to fill out at least
sixteen separate forms),
[32] hiring a non-lawyer petition preparer,
[33] or using online software to generate the petition.
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 some debt; however, the debtor will not be
granted a discharge if he or she is guilty of certain types of
inappropriate behavior (e.g., concealing records relating to financial
condition) and certain debts (e.g., spousal and child support and most
student loans). Some taxes will not be discharged even though the debtor
is generally discharged from his or her debt. Many individuals in
financial distress own only exempt property (e.g., clothes, household
goods, an older car, or the tools of their trade or profession) and will
not have to surrender any property to the trustee.
[34]
The amount of property that a debtor may exempt varies from state to
state (as noted above, Virginia and Maryland have a $1,000 difference.)
Chapter 7 relief is available only once in any eight-year period.
Generally, the rights of secured creditors to their collateral continues
even though their debt is discharged. For example, 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.
The 2005 amendments to the Bankruptcy Code introduced the "means
test" for eligibility for chapter 7. An individual who fails the means
test will have his or her chapter 7 case dismissed or may have to
convert his or her case to a case under chapter 13.
Generally, a trustee will sell most of the debtor's assets to pay off
creditors. However, certain assets of the debtor are protected to some
extent. For example, Social Security payments, unemployment
compensation, and limited values of equity in a home, car, or truck,
household goods and appliances, trade tools, and books are protected.
However, these exemptions vary from state to state.
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. Secured creditors may
be entitled to greater payment than unsecured creditors.
[35]
Relief under Chapter 13 is available only to individuals with regular
income whose debts do not exceed prescribed limits. If the debtor is an
individual or a sole proprietor, the debtor is allowed to file for a
Chapter 13 bankruptcy to repay all or part of the debts. Under this
chapter, the debtor can propose a repayment plan in which to pay
creditors over three to five years. If the monthly income is less than
the state's median income, the plan will be for three years unless the
court finds "just cause" to extend the plan for a longer period. If the
debtor's monthly income is greater than the median income for
individuals in the debtor's state, the plan must generally be for five
years. A plan cannot exceed the five-year limitation.
In contrast to Chapter 7, the debtor in Chapter 13 may keep all of
his or her property, whether or not exempt. If the plan appears feasible
and if the debtor complies with all the other requirements, the
bankruptcy court will typically confirm the plan and the debtor and
creditors will be bound by its terms. Creditors have no say in the
formulation of the plan other than to object to the plan, if
appropriate, on the grounds that it does not comply with one of the
Code's statutory requirements. Generally, the payments are made to a
trustee who in turn disburses the funds in accordance with the terms of
the confirmed plan.
When the debtor completes payments pursuant to the terms of the plan,
the court will formally grant the debtor a discharge of the debts
provided for in the plan. However, if the debtor fails to make the
agreed upon payments or fails to seek or gain court approval of a
modified plan, a bankruptcy court will often dismiss the case on the
motion of the trustee. Pursuant to the dismissal, creditors will
typically resume pursuit of state law remedies to the extent a debt
remains unpaid.
In Chapter 11, the debtor retains ownership and control of assets and is re-termed a
debtor in possession
(DIP). The debtor in possession runs the day-to-day operations of the
business while creditors and the debtor work with the Bankruptcy Court
in order to negotiate and complete a plan. Upon meeting certain
requirements (e.g., fairness among creditors, priority of certain
creditors) creditors are permitted to vote on the proposed plan. If a
plan is confirmed the debtor will continue to operate and pay its debts
under the terms of the confirmed plan. If a specified majority of
creditors do not vote to confirm a plan, additional requirements may be
imposed by the court in order to confirm the plan. Debtors filing for
Chapter 11 protection a second time are known informally as "Chapter 22"
filers.
[36]
Chapter 7 and Chapter 13 are the efficient bankruptcy chapters often
used by most individuals. The chapters which almost always apply to
consumer debtors are chapter 7, known as a "straight bankruptcy", and
chapter 13, which involves an affordable plan of repayment. An important
feature applicable to all types of bankruptcy filings is the
automatic stay.
The automatic stay means that the mere request for bankruptcy
protection automatically halts most lawsuits, repossessions,
foreclosures, evictions, garnishments, attachments, utility shut-offs,
and debt collection activity.
"Bankruptcy". Encyclopædia Britannica. 3 (11th ed.). 1911.
