Consumer bankruptcy, or when your flat is no longer decided by the enforcement court but by the trustee

We have already written about mortgages and about enforcement against property. This time we turn to a situation in which the debt is serious enough that the debtor decides on a step that goes further than fighting a single creditor: declaring consumer bankruptcy. It is a solution meant to give a fresh start to people overwhelmed by debt, but it involves handing control of your assets to a trustee, often for longer than many debtors expect.

When consumer bankruptcy can be declared

The basic and essentially the only material ground is insolvency. Under bankruptcy law a debtor is insolvent when they have lost the ability to perform their due monetary obligations, and the statute introduces a presumption here: if the delay in payments exceeds three months, insolvency is taken to have occurred. The application may be made by the debtor themselves, but also by a creditor, although in practice the overwhelming majority of cases begin with an application by the indebted person.

Consumer bankruptcy applies to natural persons not carrying on a business. It is worth knowing that since the amendment of 2020 the court no longer examines, at the stage of declaring bankruptcy itself, how the insolvency came about. Whether the debtor brought about the debt intentionally or through gross negligence is no longer a reason to dismiss the application, although it may later affect the length and terms of the creditors’ repayment plan. In practice this means the threshold for entering consumer bankruptcy is now considerably lower than it was even a few years ago.

The consequences of declaring bankruptcy

From the day bankruptcy is declared the debtor’s entire estate, property included, becomes the bankruptcy estate, that is a fund intended to satisfy the creditors. Enforcement proceedings against the bankrupt that were under way until then are stayed and subsequently discontinued, and interest stops accruing on the obligations covered by the proceedings. For the debtor this is often a relief, because the pressure of individual creditors and enforcement officers disappears; in return, however, they must submit to a far broader and more formalised procedure covering the whole of their assets at once, rather than just one debt.

The aim of the whole procedure is, on the one hand, to satisfy the creditors as fully as possible out of the sale of the debtor’s assets and, on the other, ultimately to discharge the bankrupt, that is to write off the obligations that cannot be covered from the funds obtained, usually after completing a repayment plan spread over subsequent years.

Who conducts the proceedings

The whole case is directed by the bankruptcy court, that is the competent district court, which issues the key rulings, including the order declaring bankruptcy itself. Supervision of the course of the proceedings is exercised by a judge-commissioner appointed by the court, while the day-to-day management of the debtor’s assets and their sale is handled by a trustee, appointed from the list of persons entitled to perform that function. In practice it is the trustee who is responsible for what happens to the bankrupt’s assets day to day: they establish what those assets consist of, value the individual components, sell them and account to the creditors in line with the distribution plan approved by the court.

Can you still dispose of your assets while the trustee is in charge

No. From the moment bankruptcy is declared the debtor loses the right to manage and dispose of the assets forming part of the bankruptcy estate on their own. They can no longer sell the property, let it or dispose of it in any other way, and if they nonetheless attempted such an act it would be ineffective against the bankruptcy estate. From then on all decisions concerning the assets are taken by the trustee, acting under the supervision of the judge-commissioner.

If the estate includes a flat or house in which the debtor actually lives, the court may determine the period and extent to which they may go on using it before it is sold — but that is still the court’s decision, not the debtor’s. After the trustee has sold the property, the judge-commissioner may, on the debtor’s application, set aside for them out of the sum obtained an amount corresponding to the average rent for a similar dwelling in the same or a neighbouring locality for a period of twelve to twenty-four months. That is some protection while they look for a new place to live, but it does not change the most important fact: once placed under the trustee’s management, the flat ceases to be something the debtor can dispose of on their own, until the whole procedure ends.

What is worth taking away from this

Consumer bankruptcy can be a genuine chance to escape debts that can no longer be repaid any other way, but it is a decision that hands control of your assets, property included, to a trustee for the whole duration of the proceedings. The debtor loses the ability to dispose of the flat or house independently from the day bankruptcy is declared, not from the moment of sale, and it is precisely that moment that is worth thinking through carefully before filing the application with the court.

Are you considering declaring consumer bankruptcy and wondering what will happen to your flat or house? Come to us before you take that decision and we will help you assess your options and find a sensible resolution for an indebted property before it passes under a trustee’s management.