Bankruptcy Without Illusions: How Debtors’ Conduct Is Assessed in Practice

The institution of personal insolvency was conceived as a mechanism to protect individuals who have objectively fallen into a debt trap. In practice, however, the path to opening insolvency proceedings often turns into a complex process of overcoming formal and doctrinal barriers, where the key issue is not so much the fact of insolvency itself as the assessment of the debtor’s conduct. It is precisely around the concept of good faith that one of the most acute debates in personal bankruptcy cases is currently unfolding.

When access to the procedure becomes complicated from the outset

One of the most problematic provisions remains the rule on the cessation of payments (paragraph 2, part 2, Article 115 of the Bankruptcy Procedures Code of Ukraine). Its wording creates legal uncertainty: must the 50% threshold be exceeded for each individual obligation, or for the total amount of debt?

The situation is further complicated by the fact that proving non-payment is effectively a form of “negative evidence,” the burden of which is placed on the debtor. In practice, this leads to courts requiring individuals to produce documents that are objectively difficult or even impossible to obtain from creditors, and refusing to open proceedings due to a lack of evidence that formally does not depend on the debtor’s will. Moreover, courts often attempt, already at the stage of opening proceedings, to assess the debtor’s actual financial condition and the feasibility of a restructuring plan, even though the law refers only to indicators of a threat of insolvency.

The preparatory hearing: assistance to the debtor or a hidden filter?

The Bankruptcy Procedures Code defines the preparatory hearing as a stage intended to help the debtor provide full information about their financial situation. The Supreme Court has repeatedly emphasized that, at this stage, the signs of insolvency are not formally verified; their assessment takes place only after proceedings are opened and the debt restructuring procedure is introduced.

Nevertheless, judicial practice shows a tendency toward an expansive interpretation of the grounds for refusing to open a case. The existence of assets, ongoing enforcement proceedings, or doubts regarding the accuracy of the debtor’s declaration are often used as arguments against opening proceedings, despite the fact that the statutory list of grounds for refusal is exhaustive and not subject to broad interpretation.

The debtor’s good faith as the central criterion

The Code effectively establishes the principle that the right to debt relief belongs only to a good-faith debtor. The problem, however, lies in how courts interpret this good faith. In practice, any mistakes made by the debtor—errors in declarations, unsuccessful financial decisions, or attempts to negotiate independently with creditors—are often treated as manifestations of bad faith. In its legal positions, the Supreme Court has stressed that good faith is not synonymous with perfect conduct. An individual may become insolvent not due to malicious intent, but because of life circumstances, economic risks, or even aggressive conduct by creditors. A mistake is not the same as an abuse of rights, yet this balance is frequently ignored by courts of first instance.

Creditors’ conduct: a forgotten element of assessment

Particular attention should be paid to the issue of creditors’ good faith. Judicial practice demonstrates that creditors themselves often engage in contradictory or overtly bad-faith behavior: charging unlawful fees and penalties, refusing to compromise in restructuring procedures, using loans instead of genuine investments, and in some cases creating situations in which the debtor is effectively deprived of any real possibility to fulfill obligations.

Consumer credit legislation imposes high standards of conduct on creditors. However, in insolvency proceedings these circumstances often remain outside the court’s focus. Assessing the debtor’s good faith without analyzing the creditor’s behavior creates an imbalance that contradicts the very idea of a fair balance of interests.

Risks arising from inconsistent Supreme Court practice

Certain legal positions of the Supreme Court give rise to serious debate. In particular, this concerns the possibility of closing insolvency proceedings at the debt repayment stage without overturning the ruling declaring the debtor bankrupt. Such an approach effectively leaves an individual with the status of a bankrupt, along with all statutory restrictions, but without completing the debt discharge procedure. This creates legal uncertainty and calls into question the predictability of consequences for a debtor who has formally passed through all stages of the procedure.

Bankruptcy is neither an indulgence nor a means of evading responsibility. At the same time, it should not be a trap in which any mistake automatically deprives an individual of the right to protection.