The effect of bankruptcy on a debt

Creditor's debt

Bankruptcy law is designed to try to balance the interests of all those affected by the debtors bankruptcy.  However, this does not mean that all creditors will be treated the same. The rights of creditors depend upon the type of debt they hold.

Proof of Debt

A creditor wishing to claim in the bankruptcy must submit a ‘Proof of Debt’ form which will be sent out by the Official Receiver or trustee.

  • The trustee must investigate each such claim and may admit it for dividend purposes, in whole or in part, or reject it.
  • Issues can arise in relation to money not yet due to a creditor, with regard to cross-claims and set-offs, retention of title claims and in relation to disputed debts.
  • The trustee is not obliged to accept a judgment debt or a settlement if there is evidence that these were not obtained in good faith but cannot go behind an assessment reached by HM Revenue & Customs unless this is set aside by the Tax Tribunal.
  • There is no time limit within which a creditor must submit a Proof of Debt although the trustee may impose a cut-off period.

The trustee can apply to the court for directions as to whether to accept or reject a claim in complex cases. If the trustee fails to investigate or deal with a claim for payment properly, a creditor affected by this can apply to the court for compensation.

Types of creditor

Some creditors are treated differently to others:

  • Secured creditors, being those holding a mortgage, charging order or a pawned asset may retain the benefit of this and can enforce it, by selling the asset, when they choose to do so. This is provided that the security was put in place at the right time and in the correct way.
  • Creditors who have obtained guarantees for indemnities for their debt may enforce the debt against the person or company who entered into this obligation.
  • Employees of the bankrupt are treated as preferential creditors up to £800. Any amounts due above this are treated as ordinary unsecured debts but employees may apply to the Redundancy Payments Office for unpaid wages, notice and holiday pay as well as for a statutory redundancy payment. These sums are subject to certain limits.
  • A debt owed to a spouse or civil partner is treated as a deferred debt, meaning that it ranks lowest in the order of priorities.
Dividend payments

A dividend is a payment made to creditors from monies available for that purpose in the bankruptcy. Before a dividend is declared the trustee must give notice to all creditors who are known to him or her and, if the bankruptcy has not already been advertised, must give public notice of this in the London Gazette and in such other manner as the trustee thinks fit.

The order of priority of funds in the bankruptcy is: 

  • Secured debts
  • Expenses of the bankruptcy
  • Preferential debts
  • Unsecured debts
  • Interest
  • Deferred Debts

If there are any monies left over after these payments have been made, they are returned to the bankrupt.

Taking legal advice

There may be a dispute about whether a sum claimed, or part of it, is due to a creditor, about whether security is enforceable or in relation to other issues concerning monies to be dealt with by a trustee in bankruptcy. Often these will be legal issues and we are able to advise creditors as to their rights and how to enforce them.

For more information proceed to Alternative methods of enforcement