All you need to know about bankruptcy
Bankruptcy is a legal device which applies to the rich as well as people with low earnings to give them a break from their creditors and help them recalibrate their lives towards financial stability.
In October 2017, when Kenya was just coming off a hotly contested General Election, former Lugari Member of Parliament Cyrus Jirongo was declared bankrupt for being unable to repay a KSh700 million loan.
Jirongo had taken a loan from the National Bank of Kenya and secured it using properties owned by several groups of companies. When he failed to service his debt, the bank, by public auction, sold the properties which were held as security.
According to reports by local dailies, Jirongo entered into an agreement with businessman Sammy Boit Kogo, the owner of the companies, to repay the KS700 million which was the value of the companies. Still, the politician couldn’t make the payments within the stipulated time, forcing Kogo to institute court proceedings seeking bankruptcy orders against him.
Bankruptcy is a legal device which applies to the rich as well as people with low earnings to give them a break from their creditors and help them recalibrate their lives towards financial stability.
Bankruptcy, in simple terms, is a legal process you can go through to seek a fresh financial start if you are buried under so much debt you can’t pay it. It’s often considered a worst-case scenario or a last-ditch effort to rescue one’s finances.
Bankruptcy occurs when an individual’s liabilities, which could be debts or loans, exceed his or her assets, in this case earnings or wealth.
How does it work?
In Kenya, a bankruptcy process can be initiated by the creditor (persons owed) or debtor (person owing). This is done through a formal petition which is filed at the High Court. The petition is accompanied by an affidavit, a statement of financial position and an application for the court to appoint a suitable trustee over the debtor’s estate. In Jirongo’s case, the court ordered an official receiver to be appointed as a trustee of his estate. A trustee, as defined in Section 3 of The Insolvency Act of 2015, is a person in charge of the bankrupt’s estate.
Brian Otieno, an advocate of the High Court of Kenya, says it’s important to note that when the debtor makes the application, and it is approved by a court, he or she “loses any rights to his property apart from his personal effects and tools of trade.”
Who can declare bankruptcy and why?
A bankruptcy declaration is issued by the court in the form of an order. The rationale is that courts of justice can discern between valid and malicious bankruptcy claims.
How to file for bankruptcy in Kenya
A debtor can seek a Bankruptcy Order from the court to declare him or her bankrupt. The process begins when the debtor, either in his own capacity or through an advocate representing him, files a Bankruptcy Petition in court.
The petition will be accompanied by a set of documents required in law which will then be submitted to the official receiver for approval and confirmation that the petitioner has complied with the conditions. Upon confirmation, the debtor will pay the prescribed fee to the Official Receiver and he or she will be issued with a Certificate of Compliance.
“Once all the documents are in place, the debtor or his advocate will then file the documents at the High Court, pay the court filing fees and thereafter the matter will be placed before the Deputy Registrar of the Court to confirm compliance for certification and have the matter certified ready for hearing,” says Brian.
However, before the petition hearing, the debtor is required to publish a Notice of the Bankruptcy Petition in one or more of the newspapers with the largest circulation. This is to allow creditors to file their responses to the petition.
Before being declared bankrupt, a debtor must present evidence that he is insolvent and is unable to pay his debts. So, when the matter is heard before a court, it can be determined whether a Bankruptcy Order will be issued or not based on the evidence tabled.
“If the court is satisfied, a Bankruptcy Order will be issued, and the debtor is declared bankrupt for three years. If the Court is not satisfied with the petition, the petition will be dismissed,” Brian says.
A bankruptcy order exists for a period of three years and a debtor is automatically discharged from the bankruptcy when this period lapses. However, the law allows for application of a second and, even a subsequent bankruptcy.
Once declared bankrupt, does this mean that you no longer have to pay your debts?
No, you still have to pay the piper.
Brian says a declaration of bankruptcy does not mean your debts are forgiven. It means you are steered off your debts, and the bankruptcy trustee becomes responsible for seeing of your debts.
Additionally, the trustee will engage the creditors and use the debtor’s assets to settle the debts equitably.
Reasons people go bankrupt
There are various reasons why individuals may sink knee deep into debt and be forced to file for bankruptcy. Some of them include:
Business failure – financial shortfalls in the business may require you to add more debt to the point where you don’t have enough money to pay your creditors.
Loss of employment – once you lose your job, your savings can quickly diminish, especially in an economy where the cost of living is through the roof. Not many people have emergency funds or savings to last them through long periods of tough financial times.
Poor planning – sometimes, one can incur crippling debt as a result of overspending which may be because of lack of financial planning or poor budgeting skills which can weigh you down really fast.
Medical expenses – unexpected medical problems that are not covered under health insurance can cause medical costs to add up quickly, drowning patients in thousands, if not millions of shillings in hospital bills.
Spending more than you make – If more money is going out than what is coming in, then this could probably result in missed payments and reliance on loans.
Alternatives to filing for bankruptcy
While filing for bankruptcy is a debt relief strategy that can give one a fresh financial start, Brian says there are other alternatives one can pursue to get out of debt.
The first is an Individual Voluntary Agreement where a debtor can employ the services of an insolvency practitioner. He (the insolvency practitioner) can write up a report detailing how the debts accrued will be paid off. If the court is satisfied with the report, it will issue an interim order and the report will be shared with creditors for approval. 75% of the total creditors must vote in favour of the report for it to pass. The upside to this alternative is that it comes with less publicity and is faster compared to the standard bankruptcy proceedings.
The No Asset Procedure is the second alternative. This is suitable for debtors who do not have realisable assets or assets that can quickly be converted into money. It is applied where the debt is more than KSh100,000 and less than KSh4,000,000.
This gives the debtor breathing room to handle his financial matters and get back on his feet without filing for bankruptcy. However, once a debtor is given this option, he cannot take on new debt during the period of admission.
This procedure however is not available to people who have previously declared bankruptcy or been admitted to the same procedure.
A debtor is considered admitted to the No-Asset Procedure when the Official Receiver sends out the notices in the prescribed form. The admission is also publicised in the Kenya Gazette. Once admitted to this procedure, creditors are barred from taking any steps to enforce the debts other than the ones contemplated above.
The third alternative is the Summary Instalment Order which is supervised by an insolvency practitioner.
A summary instalment order is an order from the Official Receiver directing the debtor to pay his debts in full and/or instalments to an extent the Official Receiver considers reasonable. The Receiver will make the order upon the request of the debtor or creditor but with the consent of the debtor.
Currently, the threshold of debt that is prescribed under this procedure is KSh500,000. Upon approval of the proposal, the debtor is required to pay off his debts within three years or within 5 years if agreed with the supervisor.