Personal Bankruptcy

Introduction

**Bankruptcy** is the formal insolvency process that applies to **individuals** (and to **individual partners** in a partnership), but **not** to companies or LLPs. This chapter explains **when an individual is treated as insolvent**, the **options** open to an insolvent debtor, the **legal procedures** for obtaining a bankruptcy order (on a **creditor's petition** or by way of a **debtor's application** to an adjudicator), and **what happens to the bankrupt's property** — including the sensitive question of the **matrimonial home** where a spouse, civil partner or minor children are involved. The law is found principally in the **Insolvency Act 1986 ('IA 1986')** and the **Enterprise Act 2002 ('EA 2002')**.

Assessment focus

For the SQE1 FLK1 assessment you must be able to **apply** the personal insolvency rules to a realistic client scenario rather than merely recite them. Common examination points include: the **£5,000** liquidated-debt threshold for a creditor's petition; the **three statutory routes** under **s. 268 IA 1986** for proving inability to pay; the **statutory demand** procedure and its **three-week** period; the **debtor's application** to an **adjudicator** (s. 263H, s. 263L); the **vesting** of the estate in the **trustee** (s. 283) and the exempt assets; **income payments orders** (s. 310); and above all the treatment of the **matrimonial home** under **s. 335A** — where, after **one year**, the interests of the creditors become **paramount** unless the circumstances are exceptional. This is a **closed-book** assessment, so you must recall the key sections and thresholds from memory.

Study tips

1) Memorise the magic number **£5,000** (the liquidated-debt threshold for a creditor's petition / statutory demand). 2) Learn the **three s. 268 routes** to prove insolvency: (i) unpaid statutory demand for a **present** debt; (ii) statutory demand for a **future** debt; (iii) **failed execution** of a judgment debt. 3) Remember the **one-year discharge** for honest bankrupts and the up-to-**15-year** restrictions for the reckless. 4) The **matrimonial home** is the favourite SQE point: the home cannot be sold or the bankrupt evicted without a **court order**, and after **one year** the creditors' interests are **paramount** unless **exceptional** (s. 335A). 5) Note the debts that **survive** discharge — notably **student loans** (s. 42 Higher Education Act 2004).