What is the difference between voluntary and involuntary bankruptcy? Our guest writer Holly Ransley of Ashfords LLP explains the process, timescales and costs of a debtor’s application for bankruptcy and a creditor’s petition.
What is the difference between voluntary and involuntary bankruptcy?
Voluntary bankruptcy is where the debtor (individual owing money) applies to make themselves bankrupt. A creditor’s petition (involuntary bankruptcy) arises when someone who is owed money by the debtor petitions for the debtor’s bankruptcy.
A debtor’s own application for bankruptcy and a creditor’s petition for bankruptcy are different in terms of the process, documents required, timescales and costs.
What is a debtor’s application for bankruptcy?
An individual that owes more than £5,000 can apply online to make themselves bankrupt by submitting documents demonstrating their inability to pay their debts. Formerly called a debtor’s own petition, this is known as a debtor’s application for bankruptcy. The fee for making the application for bankruptcy is £680.
Once the application has been submitted with supporting documents, an adjudicator will then decide if the debtor should be made bankrupt or not by reviewing the documentation provided and carrying out their own checks.
They must make the decision within 28 days of receipt of the application, although in some situations they may extend the period for an additional 14 days. The adjudicator can either make the bankruptcy order or refuse to do so. If the adjudicator has not decided within the time limit, this will be deemed a refusal to make the debtor bankrupt.
What is a creditor’s bankruptcy petition?
Any creditor who is owed more than £5,000 from an individual can petition for the debtor’s bankruptcy – this is known as a creditor’s petition. In order to petition for a debtor’s bankruptcy:
- the outstanding balance must be a liquidated sum payable immediately or at some point in the future
- the outstanding balance must be an unsecured debt
- it must appear to the creditor that the debtor is unable to make payment or has no reasonable prospect of being able to make payment
What is the creditor’s petition process?
In order to be able to present a bankruptcy petition, the creditor must first either:
- Attempt to recover the debt through an enforcement process. Typically, this is asking High Court Enforcement Officer (HCEO) to enforce a judgment which the HCEO returns without full payment.
- Serve a statutory demand on the debtor in accordance with the Insolvency Act 1986, demanding that the outstanding debt is paid. Then, after 21 days, they need to check that the debt has not been satisfied and that no application has been made to set aside the statutory demand. If the debt is disputed the debtor can make an application to court to have the statutory demand set aside. The court may decide on paper or require the parties to attend a hearing to consider the matter. If the court sets aside the statutory demand, the creditor will not be able to proceed with presenting a bankruptcy petition.
Once these steps have been completed the creditor can then seek to present the bankruptcy petition. Unlike the process for a debtor’s application for bankruptcy, a creditor’s bankruptcy petition will be issued and determined by the court.
The fee for sending the petition to court to be issued is £280. The creditor will also be required to pay the Official Receiver’s deposit of £990. Once the court has issued the bankruptcy petition it will be returned to the creditor to serve on the debtor. The court will also list a hearing to determine whether the debtor should be made bankrupt.
Upon receipt of the sealed petition, the creditor will be required to serve it on the debtor personally. If this cannot be achieved, they will then be required to make an application to court to serve the debtor in a different way, for example by post.
Once the petition has been correctly served the debtor will then need to provide evidence to the court along with confirmation that the debt remains outstanding and then prepare for the court hearing.
At the hearing, unlike the adjudicator, the court can make a variety of orders. They can:
- make the bankruptcy order
- dismiss the bankruptcy petition
- adjourn the hearing to a later date if the court needs more information or if the debtor asks for more time to pay
Due to the amount of stages and requirements on the creditor to ensure all the requirements have been met, a creditor’s petition can take considerably longer and costs substantially more than a debtor’s own application for bankruptcy.
When a bankruptcy order is made
The Official Receiver (OR) takes control of an individual’s assets when a bankruptcy order is made, and also decides whether or not the debtor has sufficient residual income to make monthly payments to creditors via an Income Payments Agreement (IPA).
Their assets are sold to repay creditors, but repayment takes place in a strict order of priority set out in the Insolvency Act, 1986. Unfortunately, unsecured creditors rarely receive a high return from a bankruptcy process as they are placed at the end of the payment ‘hierarchy.’ Creditors make their claim for repayment using a ‘proof of debt’ form.
Bankruptcy generally lasts for a period of 12 months in England, Wales, and Northern Ireland, after which time the debtor may be discharged if they’ve cooperated fully in the process. Scotland operates a different system regarding individual bankruptcy.
About the author
Holly is a Chartered Legal Executive in the Restructuring and Insolvency Team at Ashfords LLP. She carries out insolvency and asset recovery work dealing with a variety of debtors, with particular expertise in negotiating pre-action recoveries, dealing with overseas debtors and enforcing judgments cost awards.