Bankruptcy Provisions
01 April 2008

Part 1 of the 2007 Act that dealt with provisions on Bankruptcy was brought into force on 1 April 2008. The significant changes are noted below.

Period of Discharge

The period for the automatic discharge from bankruptcy is reduced from 3 years to one year. During the passage of the Bill the indications were that this change was brought in to align Scotland with the position in England under the Enterprise Act 2002. The premise was that by restricting the period of bankruptcy entrepreneurs would be encouraged to take risks and not be unduly restricted by the consequences of bankruptcy. We can only wait and see if that is the result.

Bankruptcy Restriction Orders/Undertakings

The obvious down side is that non-entrepreneurs could take advantage of the new bankruptcy provisions as a debt avoidance measure. Potentially to cover that situation Bankruptcy Restriction Orders have been introduced. These orders will impose further restrictions on a bankrupt and can last betweeen 2 and 15 years. The grounds for granting an oder are detailed in the Act and include prior bankruptcy, possible gratuitous alienations and possible unfair preferences. These orders apply only to individuals and only the Accountant in Bankruptcy (AIB) can make an application for an order.

A bankrupt can voluntarily be subjected to similar restrictions by entering into a Bankruptcy Restriction Undertaking with the AIB. These undertakings can last between 2 and 5 years.

Creditor/Debtor Applications

Debtor applications are no longer made to the court but to the AIB, making such applications almost an administrative process. In addition all personal sequestration actions must be made to a sheriff. This should make little difference although some creditors did use the Court of Session for sequestration applications but that route is no longer competent.

The £1500.00 limit for debtor applications remains. Creditors, however must have debts exceeding £3000.00 before they can present a petition for sequestration. The limit for service of a statutory demand is also increased but in this instance to £1500.00.

Low Income/Low Asset Applications (LILA)

The increase in the creditor limit may well lead to a decrease in creditor applications. What may lead to a significant increase in debtor applications are applications by low income low asset debtors or LILA applications as they have become known. It was originally envisaged when the Bill was published that these applications could be made by debtors with income below £100.00 per week and assets of less than £1000.00. The regulations that came into force on commencement of the ACt provided that the income was to be less than the minmum wage and assets less than £10,000.00. In addition benefits are disregarded in calculating income. As with all debtor applications these will be dealt with administratively by the AIB. It is anticipated that these provisions will lead to a substantial increase in personal bankruptcies.

The following links will take you to the relevant legislation.