A look at how a bankrupt's surplus income can be used to pay off creditors, even after the date of discharge.
Creditors still need to be paid off if possible.
When an individual enters into a bankruptcy, they will not automatically be required to make payments to most or all of their creditors. However, with lower monthly payments to make therefore, as creditors are no longer being paid off, there may well be surplus income once your monthly expenditure has been accounted for. As bankruptcy, like most debt management methods, is designed to try and get as much money back to creditors as possible, then some of your assets may be sold to help achieve this aim, and also to help pay for the costs of the whole bankruptcy process.
What is an Income Payments Agreements (IPA)?
The law allows the official receiver or the bankruptcy trustee to request from a bankrupt to make regular payments taken from their income into the bankruptcy estate for an agree time period to help pay off creditors and also the costs of the bankruptcy process. This is called an Income Payments Agreement (IPA). Such an agreement is entered into voluntarily, but id payments are missed or break other requirements listed in the agreement, then your trustee could move to have your bankruptcy discharge suspended, meaning the terms of your bankruptcy would last for longer than the typical 12 month period. A trustee can also arrange to have money taken directly from your wages, or take legal action to recover money owed.
What are Income Payments Orders (IPOs)?
The law allows your trustee to apply to a court for an order that would result in you or your employer making regular payments towards the bankruptcy estate. This is called an Income Payments Order (IPO). The trustee or official receiver will do their best to agree the amount to be paid in, but if agreement can’t be reached they will instead apply for an IPO.
An Income Payments Order is a court order, so it is vital you keep up with repayments. Failure to do so could see your bankruptcy discharge suspended, meaning that your bankruptcy lasts longer than the standard 12 month period. Alternatively they may apply to have money taken directly from your wages or take legal action to recover money owed.
How are IPA and IPO payments calculated?
An IPA or IPO will not be pushed for unless your trustee or the court believe you have spare funds available, and are thus capable of making monthly contributions towards the bankruptcy estate. They would never knowingly put you in a position whereby you do not have sufficient funds to get by and make all of life’s essential purchases. Each case is assessed on its own merits, and there are no fixed limits for how much can be contributed each month.
To make their calculations, you will be required to submit your income details and your expenditure, in a document called a Statement of Affairs (SOA) if you applied for your own bankruptcy, or in a preliminary information questionnaire (PIQB) if bankruptcy was forced on you by another party. Whichever document you require, it will break down monthly expenses such as rent, food, transport, clothing and heating. Evidence of spending will be required. With the evidence collected your trustee or official receiver will determine whether there is any surplus income. If your main source of income is from state benefits, an IPA or IPO will not normally be applied for.
What is allowable as 'reasonable domestic expenses'?
In addition to normal monthly expenses such as a mortgage or rent, which are fine as long as they are suitable amounts for the size of the property and area, food, heating, lighting, clothing and other common expenses can be included in the document. Other examples of costs that can be included are:
• TV licence, TV and video hire • Household insurance
• Car tax and insurance (if the trustee decides your car is 'exempt property' and allows you to keep it)
• AA/RAC or similar membership (if you still have your car)
• Membership of a professional body, needed for your job (unless your employer pays for this)
• Prescriptions, dental treatment or opticians
• Payment under a maintenance order or Child Support Agency assessment
• Mobile phone (a reasonable monthly cost)
• Dry cleaning
This is not an exhaustive list, and other expenses may be accepted.
The following are examples of expenses which are likely to be disallowed (unless there are special circumstances):
• Gym membership, any sports expenses or club membership
• Additional pension contributions to enhance a pension
• Private healthcare insurance
• Money for gambling, alcohol or cigarettes
• Satellite TV
• Excessive mortgage payments
Note: the official receiver will always consider your views about what is 'reasonable' or necessary spending for your circumstances.
Again, the list is not meant to be complete.
What do I include in my income?
Any payments you receive should be considered income, including benefits or tax credits and payments under any pension scheme. If you live with a partner, their income must be disclosed also, as it will be assumed they contribute to household expenses, and those details will have to be detailed.
How long does an IPA or IPO last?
An IPA or IPO usually runs for three years (36 months), from the date the agreement commences or the date the order was made. The order will state how long it runs for, and thus it normally runs two years past the date of discharge.
What happens if my income changes?
If this does occur you must inform your trustee or official receiver immediately, and you do this by filling in the relevant form detailing the change. As a result of this, the terms of your IPA or IPO may be changed, and thus payments will alter. A reduction of income may result in the suspension of your agreement, if it has increased then payments will naturally increase.
What happens if I receive a lump sum during the course of an IPA or IPO?
If this happens, it is possible that you will be asked to make a one-off payment to cover the amount remaining on the IPA or IPO. This can happen even if you have already been discharged from your bankruptcy after the standard twelve month period.
The amount claimed will depend if that discharge date has passed and also the amount of time remaining on your IPA or IPO.
What happens if I miss a payment under my IPA or IPO?
If you do happen to miss a payment for an IPA or IPO, it is vital that you look to sort the problem as soon as possible. Initially, a missed payment will usually result in your trustee or official receiver contacting you to discuss the matter. They will look to arrange for the arrears to be paid off in the shortest time possible. If this isn’t possible, and the missed payment is due to more long-term financial issues, your trustee or receiver may look to alter the terms of the agreement or order so that payments are not missed in the future.
If the trustee or official receiver decides that an IPA or IPO is no longer appropriate, they will inform you of this. If your financial situation improves again thereafter, you must inform your trustee of the change of circumstances. If this does happen, the order will restart from this point, but it will still finish on the date originally scheduled.
If you fail to tell a trustee about missed payments during the course of a bankruptcy, then the trustee may apply to the court to suspend your discharge from bankruptcy. They can also apply for another bankruptcy order against you as a way of trying to recoup the missing money. Failing to make an IPO payment can be considered contempt of court, and thus the court may punish you as a result. Thus it is vital that you are always honest throughout the course of an IPA or IPO and always inform your trustee or official receiver of a change of circumstances whether good or bad.
Applying a 'Nil tax' code.
If you have been declared bankrupt and also pay tax under PAYE, then HM Revenue & Customs (HMRC) will usually apply a “nil tax” code to you for the remainder of the tax year. Thus, soon after being declared bankrupt, your employer will be instructed not to take any income tax from your wages for the rest of the tax year. This is not the only reason that HMRC apply nil tax codes, so your employer won’t necessarily know that you have been declared bankrupt, though they may suspect it. The nil tax code does not mean no tax is due, but simply enables HMRC to claim the whole of your unpaid tax for the year of your bankruptcy.
Because of the lack of an income tax, you will have extra surplus income, and this can form the basis of an IPA or IPO – in fact this money saved may be the only money you have to pay in a nil tax IPA or IPO, and thus the order would stop when the tax code changes back. If you have other surplus income apart from the tax saving, the monthly amount paid under the IPA or IPO will reduce when your tax code changes back.