Bankruptcy estate

What it means

The bankruptcy estate is the debtor’s property that, once bankruptcy is declared, is used to satisfy creditors. It includes everything the debtor owns on the day bankruptcy is declared and acquires during it: property, machinery, inventory, money in accounts, receivables, ownership interests and intellectual property rights.

The estate is administered by the trustee, who lists, values, secures and realises it, most often by public auction, a tender or direct sale. The debtor loses the right to deal with it. The proceeds are then distributed among creditors in the order set by law.

The estate is divided into a general estate, from which ordinary creditors are paid, and separate estates made up of assets encumbered by security rights. A secured creditor, such as a bank with a mortgage on a building, is paid first from the separate estate.

How it works in practice

For a creditor, the key is to lodge the claim within the statutory deadline. An unlodged claim is not paid from the estate. For secured claims the security must also be stated in the filing, otherwise the claim is treated as unsecured.

The trustee can also bring back into the estate assets the debtor transferred to others before bankruptcy if the transfer was a voidable transaction, such as a gift or preferential treatment of one creditor. That is why the debtor’s business partners sometimes have to repay money received shortly before the bankruptcy.

In the accounts a creditor does not write off a receivable from a bankrupt debtor but sets up an impairment allowance, which is tax-deductible for lodged claims. When the bankruptcy ends, the unpaid part is written off. We always follow this procedure for our clients’ insolvent debtors.

What to watch out for

The most common mistake creditors make is missing the deadline for lodging a claim, especially when they learn of the bankruptcy late. We recommend monitoring the Commercial Bulletin and the insolvency register for important customers, or using a service that sends alerts.

For the debtor and its directors the risk is diminishing the estate before bankruptcy: selling assets below value, paying shareholders or repaying loans to close persons. The trustee examines such acts, and directors can be personally liable to creditors for the damage.