How can bankruptcy petitions help recover debt?

Following our recent article on statutory demands (SD) and winding-up petitions, if an individual has received a SD and has failed to raise a legitimate dispute or make payment, the creditor can proceed with a bankruptcy petition. Bankruptcy petitions, when used correctly, can be a useful tool for creditors pursuing debt recovery.

However, filing a bankruptcy petition against a debtor is a significant step. It can be an effective means of compelling payment when other avenues have proven unsuccessful, given the potential consequences to the debtor. In this article, insolvency litigation solicitor Matthew Hennessy-Gibbs and disputes partner Ben Crowley explore the process of using bankruptcy petitions for debt recovery and some of the key things you need to be aware of when issuing a bankruptcy petition.

What is a bankruptcy petition?

A bankruptcy petition is a legal document that initiates bankruptcy proceedings against an individual or a sole trader business. In the field of debt recovery, creditors often turn to this mechanism when all other attempts to collect a debt have failed and patience has been exhausted. By filing a bankruptcy petition, creditors aim to force the debtor into bankruptcy, leading to the distribution of assets to settle outstanding debts.

Before filing a bankruptcy petition, creditors must ensure that certain criteria are met. In the UK, the debt owed by the debtor must be at least £5,000, and the debtor must have failed to comply with a SD for payment. It is important that there is no genuine dispute to the debt. Creditors will be criticised by the court and may face adverse costs orders if it transpires that the debt is genuinely in dispute. A finding that a creditor’s issue of a bankruptcy petition is an abuse of process is not the best way to pursue a debt.

Key steps in the process

1. Issuing the petition

A creditor initiates the process by issuing the petition at court and payment of the relevant fees. The bankruptcy petition is then served personally on the debtor, usually at their place of residence, although that is not always the case, and service can be effected anywhere as long as it is upon the individual personally. This could include the debtor’s place of work or other locations when the debtor is known to be there. It is essential that the debtor is served correctly so that the validity of service is not challenged at a later stage.

2. Bankruptcy hearing

Once the bankruptcy petition is filed, a court hearing is scheduled. During the hearing, the court will assess the validity of the debt, consider any defence(s) raised by the debtor, and determine whether bankruptcy is an appropriate course of action. If the court decides in favour of the creditor, a bankruptcy order is issued, officially declaring the debtor bankrupt.

Effects of bankruptcy

Upon the granting of a bankruptcy order, the Official Receiver is automatically appointed as the provisional trustee of the debtor’s estate. Their role includes investigating the debtor’s financial affairs and determining whether a private trustee (trustee in bankruptcy) should be appointed to administer the bankruptcy. The trustee manages the sale of any non-exempt assets to repay creditors. The proceeds from the sale of assets are distributed among creditors according to a prescribed hierarchy. While this may not guarantee full repayment, it offers a structured and managed approach to debt recovery. It is always sensible to ascertain the debtor’s means before proceeding down the bankruptcy route. Does the debtor own a property, is there a charge on it, and does anyone live there that will exercise a claim to the property or part of it (for example, a partner or children)?

The assets that are considered exempt from the bankruptcy process are assets such as essential household items and tools of the debtor’s trade. Notably, valuable assets like a property may be at risk of being sold to satisfy creditors. The specifics depend on the individual circumstances of the debtor.

Bankruptcy has various restrictions and consequences on the bankrupt including limitations on obtaining credit, restrictions on directorship roles, implications for professional qualifications and even employment. The impact on an individual’s credit rating is significant as it lasts for six years from the start of the bankruptcy.

Considerations and limitations of a bankruptcy petition

Creditors should be aware that filing a bankruptcy petition is a serious step with significant potential consequences for both parties. It is essential to assess the financial circumstances of the debtor and weigh up the potential recovery of the debt against the costs involved in the process. At times when a creditor’s patience is at an end, they may seek a bankruptcy order as a point of principle rather than to recover the money sought.

Bankruptcy petitions can be an effective tool for creditors pursuing debt recovery from individuals when all other avenues have failed. It is critical to navigate the process carefully, taking into consideration the specific circumstances and potential outcomes for all parties. Understanding the criteria, initiating the process correctly, and acknowledging the limitations allows creditors to make informed decisions to enhance their chances of successful debt recovery through bankruptcy petitions.

If you are a creditor or a debtor and need advice on the next steps you should take if you have been served or threatened with a petition or if you wish to issue one, contact Matthew Hennessy-Gibbs and Ben Crowley.