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Further consequences of discharge from bankruptcy

Once discharge has taken place the bankrupt is released from all bankruptcy debts. However this is subject to a number of exceptions.

The first is that discharge does not stop the trustee in bankruptcy carrying out any remaining functions to be carried out, or the provisions of the Insolvency Act 1986 applying to those. It also does not affect the position of creditors seeking to prove in the bankruptcy. Essentially the administration of assets and the right of creditors to seek to obtain those assets within the bankruptcy continues. In the same way secured creditors can still enforce security even if the bankrupt is no longer responsible for the debt. Thus if the bankrupt granted a mortgage over property, he is no longer liable for the underlying debt, but that has no relevance to enforcement of security. Essentially these are various ways of ensuring that, as specified last week, liabilities and assets remain within the bankruptcy.

There are however some things which are bankrupt is not released from. For example if a bankrupt incurred debt by means of fraud or fraudulent breach of trust than the bankrupt is not discharged from liability for that as a result of discharge. The same applies to certain fines and penalties for offences as specified by section 281 (4) and (4A) of the Insolvency Act 1986. There are also certain other obligations such as prescribed ones which are not discharged. One which is of particular importance is that liability for a student loan is not discharged by bankruptcy by virtue of section 42 of the Higher Education Act 2004 and regulation 5 of the Education (Student Support) (No 2) Regulations 2002 (Amendment) regulations 2004. What this means is that if a student goes bankrupt he or she is still liable for his or her student loans. They are therefore a fetter which they are simply unable to get rid of. A student loan is not just for Christmas, it is for a lifetime.

Other illustrations of payments which are not released from bankruptcy are damages payable for personal injuries or orders under family proceedings were under the Child Support Act 1991. Thus for example if you drive negligently and run someone over when you are uninsured, and they suffer injury, you will not be able to escape from responsibility by becoming bankrupt.

It is also important in order to understand the scope of the bankruptcy jurisdiction to be aware of section 307 and after acquired property. When someone becomes bankrupt his estate and property automatically vests in the trustee (section 306). (There are certain exceptions to the property investing in the trustee, but they can be considered on another occasion). However that only relates to the property existing at the time the bankruptcy commences. Any property which the bankrupt receives after the commencement of the bankruptcy does not automatically vest in the trustee. Therefore under section 307 of the Insolvency Act 1986, the trustee may by notice in writing claim for the bankrupt's estate (i.e. for the benefit of the creditors) any property which has been acquired by or has devolved upon the bankrupt since the commencement of the bankruptcy. Under section 333 (2) the following duty is imposed upon the bankrupt: "where at any time after the commencement of the bankruptcy any property was acquired by, or devolves upon, the bankrupt or there is an increase of the bankrupt's income, the bankrupt, shall within the prescribed period, give the trustee notice of the property or, as the case may be, of the increase.". The prescribed period for the notice to be given within is specified in the Insolvency Rules Rule 6.200 where notice is to be given of either acquired or devolved property or increase of income within 21 days of the bankrupt becoming aware of the relevant facts. He is then not to dispose of the property acquired or devolved (without the trustee in bankruptcy's consent in writing) within 42 days beginning with the date of the notice. That time limit is mirrored in section 309 which provides that without leave of the court the trustee cannot serve a notice to acquire after the end of the period of 42 days beginning with the day on which first came to the knowledge of the trustee that the property in question had been acquired by or devolved upon the bankrupt.

Although the court can allow an application by the trustee after the expiry of the 42 day period the trustee must show good cause to justify such an extension.

Thus in general terms one reason why discharge of the bankrupt is so important is because various rights which the bankrupt may acquire post-bankruptcy are no longer subject to the threat of seizure by the trustee. In the next article we will look at the scope of those assets which the bankrupt was allowed to keep, and the impact that has upon additional applications which the trustee may make.

Michael J. Booth QC