Personal bankruptcy: who will not have their debts written off

People arrive asking "how much does it cost to have my debts written off" and are surprised when the conversation starts somewhere else: whether they will be written off at all. A procedure does not end in discharge automatically — that is a decision of the court, and it is sometimes refused. Here is exactly what it is refused for.

Two different procedures

Out-of-court bankruptcy through a public services centre (MFC). Free, six months, with a debt of between RUB 25,000 and RUB 1m. The key condition is enforcement proceedings closed for want of assets, or long-running enforcement where a pension or a state benefit is the only income. If you own a car or a share in a flat, this route is closed.

Court bankruptcy. Through the commercial court, with an insolvency officer and either realisation of assets or restructuring. There is no upper limit on the amount here, but there are costs: the officer's remuneration, publications, postage.

The out-of-court procedure is simpler, but it has a hard filter at the entrance. The court route is more widely available, but that is where the checking begins.

Why discharge is refused

The statute deals with this in Article 213.28. In practice there are four grounds for refusal, and they occur in the following order.

False information given when taking out credit. The classic case: the bank's application form shows income twice the real figure, and the supporting certificate was produced "to get approval". The bank puts the form into the case file and the court sees the discrepancy with the tax authority's data. That is a direct ground for not discharging the debt owed to that particular creditor.

Concealment or destruction of assets. Selling a car to a relative a month before filing, transferring a share in a flat to one's mother, withdrawing a large sum from an account with no explanation. The insolvency officer sees three years of account movements and transactions recorded in the state registers.

Failure to provide information to the officer. The debtor must hand over documents, bank cards and information about assets. Not attending a meeting, ignoring requests, "I didn't know I had to" — the court reads all of this as obstruction of the procedure.

Wilful evasion of repayment. This is not about having no money. It is about the situation where there is income, it is being concealed, and the money goes on day-to-day spending while enforcement proceedings are ignored entirely.

A separate category consists of debts that are never written off: maintenance payments, compensation for harm to life and health, employees' wages, subsidiary liability, compensation for losses caused to a legal entity, and debts arising from deliberately inflicted harm.

What the insolvency officer checks

The insolvency officer is not the debtor's assistant. Their job is to build up the bankruptcy estate and review transactions from the three years before the petition was accepted.

They request statements on every account, data from the traffic police and from Rosreestr (the state register of real estate), income data from the tax authority, and the bankruptcy register, and where necessary details of the spouse's transactions too, because jointly owned property also falls into the estate.

The transactions that raise questions are: sales below market value, sales to relatives, gifts, a marriage contract entered into shortly before the debts arose, and a division of assets in court "by agreement". Such transactions are challenged, the property returns to the estate, and the debtor's conduct is assessed.

What to do before filing

First: work out what you stand to lose. A sole home is preserved unless it is mortgaged. A mortgaged flat goes into realisation even if it is the only one and there are children registered as living there. A car is preserved only where it is needed because of a disability.

Second: put together the history of your borrowing. What amounts, when, and what was stated when they were taken out. If income was overstated somewhere, that is not fatal, but you need to know about it in advance and prepare an explanation of the circumstances.

Third: do not enter into transactions. Any movement of assets in the run-up to bankruptcy works against the debtor. An attempt to "save" a flat by transferring it ends with the flat being returned to the estate and discharge being refused — you lose both.

Fourth: weigh up the alternatives. Sometimes restructuring with the bank or a settlement is better than bankruptcy: bankruptcy closes off access to credit, bars you from running a legal entity for three years, and for five years obliges you to disclose the bankruptcy when taking out a loan.

What happens to your job and your family

Personal bankruptcy does not cost you your job and does not affect your employment rights, apart from a ban on holding management positions for three years, and for longer in financial institutions.

A spouse's property acquired during the marriage falls into the common estate: the debtor's share is realised and the other spouse is paid their part of the proceeds. This is an unwelcome part of the procedure, and one that is often discovered only once it is already under way.

Timescales

Court proceedings with realisation of assets take at least six months, though in reality more often nine to twelve where there are contentious transactions. The out-of-court route takes exactly six months, provided the debtor acquires no assets in that time and no creditor files objections.

This material is for information only. Every debt story is made up of details: two similar situations can end differently because of a single transaction from three years ago.

If you are considering bankruptcy and want to understand in advance how it will end, write to us — the first consultation is free when an engagement is signed.

Sergey Besedin — partner of Kovalev & Partners LLC, lawyer