What is bankruptcy?

The state of a person who has been adjudged by a court to be insolvent (compare WINDING-UP). The court orders the compulsory administration of a bankrupt's affairs so that his assets can be fairly distributed among his creditors. To declare a debtor to be bankrupt a creditor or the debtor himself must make an application (known as a bankruptcy petition) either to the High Court or to a  county court. 

If a creditor petitions, he must show that the debtor owes him at least £750 and that the debtor appears unable to pay it. The debtor's inability to pay can be shown either by: (1) the creditor making a formal demand in a special statutory form, and the debtor failing to pay within three weeks; or (2) the creditor of a judgment debtor being unsuccessful in enforcing payment of a judgment debt through the courts. If the petition is accepted the court makes a bankruptcy order. Within three weeks of the bankruptcy order, the debtor must usually submit a statement of affairs, which the creditors may inspect. This may be followed by a public examination of the debtor. After the bankruptcy order, the bankrupt's property is placed in the hands of the *official receiver. 

The official receiver must either call a creditors' meeting to appoint a trustee in bankruptcy to manage the bankrupt's affairs, or he becomes trustee himself. The trustee must be a qualified insolvency practitioner. He takes possession of the bankrupt's property and, subject to certain rules, distributes it among the creditors.

A bankrupt is subject to certain disabilities (see UNDISCHARGED BANKRUPT). Bankruptcy is terminated when the court makes an order of discharge, but a bankrupt who has not previously been bankrupt within the preceding 15 years is automatically discharged after three years. See also VOLUNTARY ARRANGEMENT. bankruptcy order A court order that makes a debtor bankrupt. When the order is made, ownership of all the debtor's property is transferred either to a court officer known as the official receiver or to a trustee appointed by the creditors. It replaced both the former receiving order and adjudication order in bankruptcy proceedings.