Consumer bankruptcy – when should it be declared

Dawid Zwijacz

 14. June 2019

A consumer bankruptcy petition will be effective if the requirements set out in the Insolvency Act are met. These include:

• Insolvency – the person filing for bankruptcy must be insolvent, which means that he or she is permanently not capable of settling their debt;
• Insolvency did not arise due to an intentional act or through gross negligence – the person filing for bankruptcy cannot have culpably caused their financial detriment;
• No previous bankruptcy proceedings may have been conducted against the person filing for bankruptcy in the last 10 years.

Insolvency

A debtor is insolvent if one of the two requirements set out in Article 11 of the Act is met. The first requirement, the loss of solvency, is universal and applies to all debtors. The second requirement, the excess of liabilities over assets, is complementary and applies to specific organisational entities. In the case of consumer bankruptcy, only the first requirement should be analysed.

According to the law, a debtor is insolvent if they lost their ability to pay due and payable monetary liabilities. A debtor is presumed to have lost their ability to pay due and payable monetary liabilities if the debtor has not repaid the debt for over three months and the debt is of monetary nature and is due and payable – the creditor is authorised to seek repayment in court proceedings. The creditor is not always authorised to do so because often the deadline for repaying the debt has not lapsed yet or was never set in the first place.
Importantly, consumer bankruptcy may be filed for even if the debtor has only one creditor – unlike in insolvency proceedings for corporate debtors where the debtor must have at least two creditors.

Effective bankruptcy petition

The decision on filing for bankruptcy may have significant implications for the legal and financial situation of the debtor. An inconsiderate action resulting in dismissing the bankruptcy petition by the court may close the door on this opportunity for another 10 years. Moreover, when considering the option of declaring consumer bankruptcy, the debtor should be aware that this may involve the loss of private assets, which will be liquidated to satisfy creditors' claims. On the other hand, a carefully timed filing for consumer bankruptcy may result in the cancellation of outstanding debts by the insolvency court. The situation of every debtor should be analysed on a case-by-case basis and it is best to contact a consultant for professional support. This step is definitely worth considering if the debtor has had difficulties repaying their debt for a longer period of time and the creditors keep sending demand letters.