The matter in brief
How it went
The situation. The client had accumulated debts of RUB 40 million after an unsuccessful business project and turned to us for personal bankruptcy, fearing the loss of the only flat in which he lives with his family.
What we did. We carried out the personal bankruptcy procedure in full compliance with the requirements for forming the bankruptcy estate, and ensured that the only home was correctly excluded from the property to be sold.
The result. The RUB 40 million debt was written off at the end of the procedure, and the client’s only home was preserved in full.
A similar situation? Let us discuss the details at a consultation.
Legal framework: the insolvency law and the only home
Personal bankruptcy is governed by Chapter X of Federal Law No. 127-FZ on Insolvency (Bankruptcy). It determines how the bankruptcy estate is formed, and which of the debtor’s property is sold and which is excluded.
Enforcement immunity. Under Article 446 of the Russian Civil Procedure Code, the only home fit for permanent residence of the debtor and their family members is not included in the bankruptcy estate and cannot be sold at auction, regardless of its size and market value.
The key exception is a mortgage. The immunity does not apply if the home is pledged to secure the obligation that led to the bankruptcy. A secured creditor may demand that such a flat or house be sold, even if it is the family’s only home.
The financial manager is obliged to check the status of the home when inventorying the individual’s property. It is at this stage that it is decided whether the home will be excluded from the bankruptcy estate.
How personal bankruptcy generally proceeds
The general scheme of the procedure laid down by law, regardless of the particular case.
Filing the petition
The application is filed with the commercial court together with documents on income, property, accounts and creditors. Where the debt is small and there is no property, a simplified out-of-court procedure through the MFC is possible.
Opening the procedure
The court introduces debt restructuring if the debtor has a source of income to repay on a schedule, or moves straight to the sale of assets. A financial manager is appointed at the same time.
Forming the register and the inventory of property
The manager inventories and values the property, less what is protected by law, including the only home. Creditors submit their claims within the period set by the court.
Sale and completion
Property subject to sale is sold at auction and the proceeds are distributed among creditors. At the end, the court issues a ruling completing the procedure and, where there are no signs of bad faith, releasing the debtor from further claims.
Time limits and thresholds worth knowing
General benchmarks set by law, not figures from any particular case.
Common misconceptions about personal bankruptcy
“After bankruptcy, all debts are written off.” They are not. Claims for maintenance, compensation for harm to life and health, payment of wages, and subsidiary liability remain with the debtor even after the procedure ends.
“Your home will be taken in any event.” The only home fit to live in is protected by enforcement immunity. It is sold only where it is mortgaged or otherwise pledged for the debt that led to the bankruptcy.
“You can transfer your property to relatives in advance.” The financial manager and creditors may challenge such transactions made within three years before the application. If signs of deliberate or fictitious bankruptcy are found, the debtor faces criminal liability under Articles 195-197 of the Criminal Code and a refusal to write off debts.
“After the debts are written off, there are no consequences.” Some restrictions remain for years, from the duty to disclose bankrupt status when applying for a new loan to a temporary ban on holding management positions in organisations.
Risks and restrictions to bear in mind
Challenges to transactions. Selling property at an undervalue, gifting to close relatives, or repaying one creditor ahead of the others, if done in the run-up to bankruptcy, may be declared invalid, and what was received under them returned to the bankruptcy estate.
Refusal of release from debts. If the court finds that the debtor acted in bad faith, by concealing property, giving the manager knowingly false information or building up debts while aware of insolvency, the write-off may be refused and the debts remain with the individual.
Restrictions after the procedure ends. For five years you must disclose the fact of bankruptcy when applying for a new loan or credit. For three years you cannot hold positions on the management bodies of a legal entity (five years for banks, ten years for insurance companies, non-state pension funds and credit cooperatives).
Subsidiary liability. If the individual’s bankruptcy is connected with a business they previously owned, there remains a separate risk of being held subsidiarily liable for the company’s debts. This is an independent ground that personal bankruptcy does not write off.
Frequently asked questions
Can a director avoid subsidiary liability if the company went bankrupt through no fault of theirs?+
Yes, if they can prove the economic justification for their decisions and the absence of fault for the bankruptcy. This is the key line of defence.
Can assets that the debtor stripped out before bankruptcy be returned?+
Yes, by challenging such transactions within the bankruptcy case, if it can be proved that the parties were affiliated or the price was understated.
Is this a real case or a generalised example?+
It is a real matter from the firm’s practice. We publish it without company names or the names of the participants, as every client agreement includes a non-disclosure clause.