What is a creditor petition for bankruptcy?

Understanding a bankruptcy order to begin formal repayment process

A creditor petition for bankruptcy is an application made to the court by a creditor, typically after several unsuccessful attempts have been made to recover their debt. If a bankruptcy order is subsequently made, the debtor’s assets are then sold with a view to repaying the creditor.

It’s a process strictly governed by regulation, and one that requires creditors to complete certain steps before the court will consider their application. It’s also a costly process for the creditor – currently £990 for the petition deposit, plus court fees of £280.

So what criteria must be met by a creditor prior to petitioning for an individual’s bankruptcy, and what process must they follow?

Criteria for making a bankruptcy petition

To make a bankruptcy petition, the debt must be £5,000 or more and owed either to one creditor or a group of creditors. They must be able to prove they’ve attempted to collect the debt, and this is typically done in one of the following ways:

• Serving a 21-day statutory demand on the debtor, which remains unpaid and not secured - with a charging order or guarantee, for example - and where the debtor has not applied for the statutory demand to be set aside.
• Taking enforcement action, such as using bailiffs to seize assets for sale, or other enforcement measures

What is a statutory demand?

A statutory demand is an important part of the process when a creditor wants to petition for bankruptcy. It’s a formal demand for payment of a debt that is typically served on a debtor in person.

The debtor has 21 days from receiving the demand to pay the debt in full, or come to an arrangement to pay in instalments. If this doesn’t happen the creditor has four months in which to make a petition for bankruptcy.

The creditor petition for bankruptcy – what is involved?

Petitioning for the bankruptcy of an individual requires the creditor to take certain steps, including signing a declaration to confirm they’ve searched for other bankruptcy petitions against the debtor during the previous 18 months.

If a petition has been made, the creditor can choose to support it rather than carrying on with their own petition, which given the high fees associated with making someone bankrupt, can be beneficial on cost grounds alone.

In addition to signing the declaration the creditor must sign a ‘statement of truth’ regarding the details in the petition, and provide evidence that the money is actually owed.

Submitting the bankruptcy petition

Under some circumstances the petition should be submitted online, and will be dealt with by the High Court - if the debt amounts to £50,000 and the debtor lives in London, or they have no fixed address.

Otherwise, it should be handed to the county court located most closely to the debtor, with a copy also being served on them personally. A hearing will then be arranged for not less than 14 days later.

The bankruptcy hearing

The court has a number of options when all the evidence has been presented and the bankruptcy hearing concludes:

• Cease or delay proceedings (known as a ‘stay of execution’) – sometimes this option is used so the debtor can organise their finances with a view to paying the debt, or to allow more time for evidence to be presented
• Dismiss the petition if they believe the creditor is being unreasonable in refusing offers to pay in instalments, or it’s found that the debt has already been paid off
• Make a bankruptcy order

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.

If you would like more information about creditor petitions for bankruptcy, Begbies Traynor can help. We are bankruptcy experts and will offer a more detailed insight into how the process works. Call one of the team for a free same-day consultation – we operate from more than 50 offices nationwide.