Bankruptcy filings dip despite rising debt

Kenyans are avoiding filing for bankruptcy amid mounting debts and a rise in seizure and auction of defaulters’ properties.

Official data shows that only four Kenyans filed for bankruptcy in the seven months to July, down from 10 in the same period last year and nearly 500 before 2015.

This comes in a period when auctioneers are reporting a glut of repossessed vehicles, land and homes, and office equipment are being sold off cheaply across Kenya in the wake of debt defaults.

Non-performing loans in the banking industry have more than doubled over the past five years to Sh379.9 billion in June.

Lawyers attribute the dip in bankruptcy filings to changes in the Insolvency Act in 2015, which tightened the process of seeking a court’s protection from creditors.

“The new Act has done away with mischief where one could rush to court get an order to avoid paying debt and transact through their wife or brother. We used to get bankruptcy orders ranging from 300 to 500 a year,” said Gad Ouma, the managing partners at GM Gamma Advocates.

The repealed law had been in use for about 85 years, with little amendment over the years, and had become an easy way out of debt for many individuals who knew exactly how to manipulate the system and get away with it.

This meant that people were filing for bankruptcy to evade paying their debts. After the Insolvency Act of 2015 was passed, the number has fallen to 80 bankruptcy cases over the five years, which means it is no longer easy to escape debt.

Of the 80 filings, 67 were by individuals who have defaulted on debt while 13 were petitions from firms and individuals owed money.

A slowing economy, which has been worsened by the effects of Covid-19, has created a pool of distressed borrowers whose assets are being seized by newly aggressive lenders.

But getting declared bankrupt is no longer an easy route out of debt troubles.

While declaring bankruptcy, one will have to show the court and the Official Receiver that one’s debts far outweigh assets in their name.

In court, creditors will get a chance to support or oppose the bankruptcy application.

After bankruptcy has been declared, the Official Receiver appoints a trustee to manage the individual’s estate.

Under the old Bankruptcy Act, someone who voluntarily presented himself or herself in court could nominate just about anyone to manage their estate once declared bankrupt, opening way for people to tap friends and relatives.

But the Insolvency Act now says that the bankruptcy trustee must be licensed as an insolvency practitioner.

After a bankruptcy trustee has been appointed, he or she calls a creditors’ meeting, where anyone claiming money will have to prove how the debt arose. The claims are then investigated and debts paid in order of size and necessity.

But tools of trade, clothes and household furniture are exempt from attachment for purposes of paying creditors.

During the bankruptcy proceedings in a court, the insolvent individual is required to publish an advert in a newspaper of wide circulation.

The Official Receiver or bankruptcy trustee can also get a warrant from court to search houses or other premises if they are believed to contain evidence that an individual declared bankrupt is concealing assets.

Under the new law, the bankruptcy trustee will offload one’s debts as best as possible within three years.

After the three years, you get to start life debt-free, but with nothing to your name in the event your estate was unable to retain anything after debt repayment.

The Insolvency Act allows the bankrupt to retain some property like household furniture, personal effects and a car whose value is below Sh1 million.

But the law does not allow a bankrupt person to hold public office.

Bankrupt persons are only allowed to handle cash they need for subsistence, accommodation and transport.

“When you are declared bankrupt you may not qualify for certain positions like elective posts,” says Mark Gakuru, the Official Receiver based at the State Law Office.

“If you are a civil servant your money will be paid directly to the trustee who will give you 25 per cent for sustenance while the rest will go to settling debts but after three years all the debts are forgivable.”