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Posted - 23 March 2007 : 17:18:33
Part 2 - IPAs ASSESSMENT OF REAL DISPOSABLE INCOME
December 2006
31.7.6 Identifying surplus income - initial stage
Whether completing the statement of affairs or in creditor petition cases the Bankruptcy Preliminary Information Questionnaire (form PIQB) the bankrupt should, in all cases, answer any questions regarding income and outgoings, providing full details of monthly income he/she receives (from all sources) and usual monthly expenditure. This may include accommodation, food, housekeeping, utilities, travel costs, clothing etc. and other regular outgoings. See paragraphs 31.7.19 and 31.7.24 for further information as to a consistent approach when considering whether expenditure claimed by the bankrupt is reasonable.
In the case of a debtor's petition, the bankrupt's income and expenditure figures should be available from the statement of affairs for consideration at the preliminary enquiry stage. Chapter 4, Initial procedure when bankruptcy order made, Part 3 provides guidance concerning the correct interview procedure to follow should an IPA/IPO be considered appropriate once the statement of affairs has been examined. Where a bankrupt is required to complete a preliminary information questionnaire ( PIQB), he/she should be asked to return the completed PIQB prior to any interview with supporting evidence such as pay slips and utility bills. This will allow the examiner to consider whether the bankrupt may have sufficient surplus income to make payments under an IPA/IPO and, if necessary, note any unusual or excessive items of expenditure requiring further explanation by the bankrupt at interview.
It may be that the information already provided is sufficient for the official receiver to ascertain that there is little likelihood of an IPA/IPO as the information shows that the bankrupt's sole source of income is derived from benefits or the bankrupt has proved to the official receiver that he/she has insufficient surplus income from which to make any contribution.
Where the bankrupt appears to have income in excess of what is required to pay for his/her reasonable domestic needs and those of his/her family, an IPA should be considered by the official receiver based on the "real disposable income" that is available. If a bankrupt's expenditure appears to equate exactly with his/her evidenced income, leaving nothing to pay into the estate, the figures should be closely examined and a full explanation sought, especially where expenditure appears to vary considerably from the averages recorded for the relevant family group in the Family Expenditure Survey. Questions concerning previous debt repayments should also be considered, particularly as most bankrupts make payments of some sort to their creditors prior to the making of the bankruptcy order. Whilst the creditor debts which the bankrupt has been attempting to service prior to bankruptcy from his/her income (and that of his/her partner as appropriate) may now be included as unsecured creditors within the bankruptcy proceedings, information concerning these pre- bankruptcy debt repayments may help to provide a context in which to consider whether amounts claimed by the bankrupt as necessary expenditure post bankruptcy are reasonable.
Each case must be considered on its merits but a consistent approach regarding reasonable expenditure must be maintained. This may mean that where a bankrupt has pared expenditure down to a level where it is likely he/she will have difficulty in funding their own reasonable domestic needs, it may be necessary to build in some flexibility, e.g. incorporating a monthly allowance for a moderate holiday (see paragraph 31.7.26). On the other hand, where it appears a bankrupt is seeking to avoid making any contribution in order to maintain his/her lifestyle at the expense of the creditors, all outgoings should be carefully examined and tested against guidelines provided, taking in to account the averages as shown in the Family Expenditure Survey and expenditure guidance at paragraphs 31.7.19 and 31.7.24. It is important to remember when making an assessment of expenditure claimed by the bankrupt that it is his/her reasonable domestic needs that need to be considered, [note 1 ] as opposed to basic domestic needs [note 2].
It should also be remembered that whilst the IPA is intended to provide some kind of return to the creditors, bankruptcy is intended to allow the individual to start afresh and remain solvent in the future.
In cases where the bankrupt has sufficient assets in addition to an IPA which may warrant the appointment of an insolvency practitioner at a meeting of creditors, the official receiver should continue with the necessary procedure to ensure the IPA agreement comes in to force at the earliest opportunity and should not neglect to secure the payments under the IPA pending the appointment of an insolvency practitioner. Where the IPA is the only or principal asset, once the IPA is effective the continued administration of payment collection and monitoring should be dealt with by the appropriate RTLU.
31.7.7 Income sources which can be included in the IPA/IPO calculation
Various income sources available to the bankrupt can be considered by the official receiver/trustee when making an IPA/IPO calculation, as follows :
*
Employment and self-employment - see paragraph 31.7.8
*
State benefits - see paragraph 31.7.9
*
Arrears of benefits received post bankruptcy - see paragraph 31.7.10
*
Pension Receipts - see paragraph 31.7.11
*
Periodic payments in respect of loss of earnings/personal injury - see paragraph 31.7.12
*
Income arising from capital property- see paragraph 31.7.13
*
Tax refunds - see paragraph 31.7.14
*
Income arising from nil tax (NT) coding - see paragraph 31.7.15
*
Income received from spouse/civil partner/partner - see paragraph 31.7.16
*
Income from adult children and other adult members of household- see paragraph 31.7.17
31.7.8 Employment and self-employment
Bankruptcy cases where the bankrupt is in paid regular employment and has a surplus of income over (reasonable) expenditure will be the most likely source of any IPA/IPO. However, where a bankrupt is self-employed, although the income he/she receives may be a variable amount each month, it should still be possible for the official receiver to identify if the bankrupt is likely to have a surplus of income after allowing for reasonable expenditure. This may be done in a number of ways and may require the official receiver to review the bankrupt's circumstances more frequently than in cases where the IPA/IPO is based on income received as a result of being employed.
Examples of possible means by which surplus income can be claimed from a bankrupt who is self-employed include considering an average of the bankrupt's income received over a given period, through analysis of any records or accounts supplied to the official receiver, and then agreeing a monthly repayment with the bankrupt based on the average surplus income calculated.
In other cases where the bankrupt's income varies on a seasonal basis, it may be possible to agree an IPA which covers only the specific period when the bankrupt is in receipt of surplus income (e.g. for a six month period in the summer or winter depending on the nature of the seasonal income).
In circumstances where the bankrupt is in receipt of staged payments (such as those received by building contractors) or is paid on a commission basis (such as a self-employed sales person) their basic salary may provide insufficient income for an IPA, but in conjunction with staged payments/non monthly commission income received may provide adequate surplus to agree an IPA. In these circumstances if appropriate, the official receiver could propose an agreement with the bankrupt for him/her to pay (for example) bi-annual or annual contributions. In these cases the official receiver can agree the particular payment terms within the IPA, to be signed and agreed by the bankrupt.
What must be remembered in all cases, as stated at paragraphs 31.7.2 and 31.7.5, is that the length of any IPA, however the payment terms within the IPA are agreed, cannot exceed three years from the date of the commencement of the agreement.
31.7.9 State benefits
An IPA should not be sought where the bankrupt's only or main source of income is state benefit payments without any other significant source of income [note 3]. This applies even in the rare circumstances where the official receiver's analysis of the bankrupt's income and expenditure discovers sufficient surplus for an IPA arising as a result of the income received by the bankrupt which either solely or chiefly comprises state benefits. The official receiver should consider that it is always open to the bankrupt who wishes to contribute, to make voluntary payments. If the bankrupt was minded to contribute on a voluntary basis, having been informed that their income appeared to be sufficient to produce a surplus taking in to account their reasonable domestic needs, a voluntary agreement could be incorporated into an IPA, but it would have to be clearly noted that no enforcement action would be taken if the bankrupt failed to make agreed voluntary repayments.
This does not mean that the official receiver must exclude all benefit payments received by the bankrupt when calculating available income for an IPA. The person making the calculation (usually the examiner) should first consider whether there is income paid to the bankrupt not comprising state benefit . If this is the case, an IPA may be a possibility, and any calculation of income should include all available income, including state benefits which are paid to an individual for the general benefit of that individual and their family. The notable exceptions to this rule when dealing with state benefits are disability living allowance (which is not considered by the Department of Work and Pensions to be income) and child benefit. The High Court has stated as a matter of public policy that child benefit and similar benefits should not be included in the statement of income when applying for an IPO and there is no reason why this point should not be extended to cover IPAs. Whilst it is acknowledged that in the figures for expenditure there may be outgoings for the benefit of the children, at least to the value of the child benefit received, to ensure that there is no risk of them being deprived of it, child benefit should not be included in IPA assessments. The Department of Work and Pensions website provides useful information regarding allowances and benefits currently in force and can be accessed at http://www.dwp.gov.uk/
Where the bankrupt is in receipt of benefits and other sources of income, the total income should be established (see other income sources at paragraph 31.7.7) and the bankrupt's reasonable expenses deducted (see paragraph 31.7.19). An assessment can then be made as to whether the bankrupt is in receipt of income surplus to his/her reasonable domestic needs. If there is a surplus of income, this surplus should be less than or equal to income from the source other than benefits in order for an IPA to be sought. It should be remembered that whilst the bankrupt's total income including state benefits should be included in the calculation of surplus income, it is the income from sources other than the benefit(s) which is providing the payments under the IPA/IPO, the surplus income from which an IPA is sought should not be comprised of state benefit.
31.7.10 Arrears of benefits received post bankruptcy
Occasionally, where a bankrupt is in receipt of benefits he/she may receive arrears of benefit payments as a post bankruptcy receipt (prior to discharge). Where this happens, because state benefits are excluded from the bankruptcy, the arrears of benefit (including tax credits ) cannot be claimed as a vested asset because they are state benefits. It may however be possible to claim the monies under the income payments provisions of the Insolvency Act by agreeing a single payment agreement with the bankrupt as a voluntary contribution. Any arrears of benefit claimed in this way should not include any child tax credit benefits.
N.B. official receivers must ensure when dealing with arrears of benefit in this way as a voluntary contribution, that the payment does not represent an overpayment, which has been paid to the bankrupt post bankruptcy and which can be recovered after discharge in specific circumstances.
31.7.11 Pension Receipts
Other income available to the bankrupt can include pension receipts where the bankrupt is already in receipt of the pension income (see Chapter 61, Pension Schemes, paragraphs 61.3 & 61.7) but payments by way of guaranteed minimum pension and payments giving effect to the bankrupt’s protected rights must not be included an any IPA calculation.
Where the official receiver becomes aware that the bankrupt (prior to discharge) is due to receive payment from a pension, the official receiver may seek to agree an IPA to recover any lump sum, or if this is not possible to agree, apply to court for an income payments order to recover any lump sum, and may include other pension payments in the calculation for income in his/her application.
Where an IPA/IPO is in force and the official receiver/trustee becomes aware that a bankrupt is likely to attain retirement age during the period of the IPA/IPO they should be made aware that their pension entitlement may be affected and a variation sought to claim the pension monies in whole or in part (see also paragraph 31.7.52 and Chapter 61, Pension Schemes, paragraph 61.27)
31.7.12 Periodic payments in respect of loss of earnings/personal injury
Under section 101(4) of the Courts Act 2003, [note 4] the bankrupt's right to receive periodic payments in respect of personal injury will not form part of the bankrupt’s estate. This means that the bankrupt will continue to receive periodic payments during, and after, bankruptcy. Section 101(4)(c) of the Courts Act 2003 [note 5] further states that periodic payments received by the bankrupt in respect of personal injury care and medical costs during the period of bankruptcy cannot be subject to the IPA/IPO provisions as they do not form part of the bankrupt's estate. Periodic payments which have already been received by the bankrupt prior to the date of the bankruptcy order will form part of the bankrupt’s estate. Other assets bought with periodic payments will also continue to vest in the trustee.
Periodic payments in respect of loss of earnings remain subject to the IPA/IPO provisions of the insolvency legislation and can therefore be included in an IPA/IPO calculation.
To facilitate the relationship between periodical payments in respect of claims for personal injury and insolvency and social security law, Civil Procedure Rule (CPR) 41.8 [Note 6] requires orders for periodical payments to identify the annual amount awarded for future loss of earnings and other income and also the amount awarded for future care and medical costs and other recurring or capital costs.
In cases where the bankrupt is in receipt of periodic payments covering loss of earnings and care and medical costs, and the award exceeds the actual care costs, the official receiver must remain within the spirit of the legislation, which excludes payments for care costs being attached by an IPA/IPO. Accordingly, where the bankrupt receives payments in respect of both loss of earnings (included income) and medical care costs (excluded income), the official receiver should consider all income from which the bankrupt benefits, then deduct all reasonable expenses (which would include the care and medical costs being incurred) to assess whether there is surplus income.
If the surplus is found to be less than or equal to income from a source other than the excluded income, it would be appropriate to seek an IPA/IPO. If not, the official receiver could consider either a reduced IPA/IPO that would not exceed the amount of the included income or, alternatively, seek a voluntary payment from the bankrupt. The agreement to make such voluntary payments should take the form of an agreement similar to an IPA, but it would have to be clearly noted that no enforcement action would be taken if the bankrupt failed to make the agreed voluntary payments. This is similar to voluntary payments agreed in respect of surplus state benefit received as detailed in paragraph 31.7.9.
With regard to redundancy payments, it should be noted that any periodic payments in respect of redundancy represent compensation for loss of a job, and a redundancy payment whether received before or after the making of the bankruptcy order should not be treated as income or be included in an IPA, as it is an asset of the bankruptcy estate and should be realized accordingly. See Chapter 31.5, Monetary assets, paragraphs 31.5.14 and 31.5.15 regarding redundancy payments.
31.7.13 Income arising from capital property
The definition of income is very wide and can include income from a tenanted property, interest from a bank account or income from an annuity/pension. Where the bankrupt has an interest in capital assets as at the date of bankruptcy, e.g. bank accounts, property, shares etc, these will be vested assets and should be realized within the bankruptcy proceedings. In the same way if the bankrupt receives a capital asset post bankruptcy (but prior to discharge) the asset and payments (such as dividends) arising from ownership of the asset can be claimed as after acquired property. However, there is no reason as such why income received by the bankrupt , derived from capital assets, should not be included in an income payments calculation (see Chapter 61, Pension Schemes, paragraph 61.27 and case of Kilvert v Flackett [1998] BPIR 721 [note 7][note 8]). Examples of where this may be necessary could be where the bankrupt is already in receipt of income derived from a capital asset and the official receiver/trustee is seeking clarification as to whether the bankrupt's interest in the capital asset can be realized within the bankruptcy estate, or where it is not possible to realize the asset within the bankruptcy estate, e.g. where the bankrupt as the beneficiary of a trust receives income (such as rent) arising from capital property held by the trust. See Chapter 31.5, Monetary Assets, Part 2 and Chapter 31.3, Dealing with freehold and leasehold properties, Part 2, for further explanation including income received from trusts and rental income.
31.7.14 Tax refunds
The bankrupt may receive tax refunds for periods both before and after bankruptcy. Tax refunds paid to a bankrupt for periods prior to the bankruptcy order date and for the tax year in which the bankruptcy order was made can be claimed using the bankrupt's duly completed Income Tax and National Insurance disclosure authority (form TNIDIS), see also Chapter 77, Direct Taxation, paragraph 77.22, Information available from HMRC.
Any refund in respect of tax years following the tax year in which the bankruptcy order was made may be claimed by means of an income payments agreement/income payments order (IPA/IPO) where the bankrupt remains undischarged. The IPA should clearly state what is being claimed and the IPA agreement accepted and signed by the bankrupt and the official receiver/trustee prior to discharge in order for it to become valid (see paragraph 31.7.2) If the bankrupt fails to agree the IPA/give consent the trustee may still recover the tax refund by applying for an IPO (stating clearly in the IPO application what is being claimed) as long as the application is instituted prior to the date of discharge [note 9].See also Chapter 31.5. Monetary Assets, Paragraph 31.5.71, Tax refunds - bankruptcy, and Chapter 77, Direct Taxation, paragraph 77.62,Tax refunds and set off.
Electronic notification of the bankruptcy order will be sent to HMRC where the Insolvency Claims Handling Unit (ICHU) deals with claims in insolvency proceedings relating to both tax and National Insurance. Data on new bankruptcy cases is automatically electronically extracted from LOIS and sent to the Inland Revenue Insolvency Unit at Longbenton (see Chapter 4, Initial Procedure when bankruptcy order made, paragraph 4.55, HM Revenue and Customs), which has the effect of notifying HMRC (local tax office) of the bankruptcy proceedings. It also enables the local tax office to identify for payment to the official receiver or trustee, any refund of tax, and also to apply the Nil Tax (NT) coding to the bankrupt's income as appropriate (see paragraph 31.7.15).
It will still be necessary for the bankrupt to complete a tax and national insurance disclosure authority form (form TNIDIS), which should be retained on file until required. It is not necessary to send form NTI ( initial enquiry letter to tax offices) accompanied by form TNIDIS in all cases. See also Chapter 4, Initial Procedure when bankruptcy order made, paragraph 4.55, HM Revenue and Customs.
31.7.15 Income arising from nil tax (NT) coding
Where bankruptcy occurs, HM Revenue and Customs (HMRC - formerly Inland Revenue) submits a claim in the bankruptcy proceedings for the whole of the outstanding tax due in that tax year, for both employed and self-employed individuals. The claim submitted in the proceedings by HMRC is dealt with in the same way as any other unsecured creditor. As a consequence of HMRC submitting this claim for outstanding tax in the year of bankruptcy, where the bankrupt is employed on a PAYE basis, HMRC applies a nil or no tax (NT) code to the bankrupt's salary for the remainder of the tax year in which the bankruptcy order was made. The NT code is applied to all income earned by the bankrupt after the bankruptcy order date, either until such time as there is a change in the bankrupt's source of income, or the tax year in which bankruptcy occurs comes to an end, whichever event is the earliest. This means the bankrupt does not pay any tax on his/her income whilst the NT code is in force and is thus in receipt of additional income to that received prior to the application of the NT coding.
If the bankrupt changes income source/employer during the course of the tax year in which he/she is made bankrupt (which could include becoming self - employed having previously been PAYE employed), HMRC deems this to be a change in source of income, and a new tax code will be issued. The bankrupt will be required to pay tax on his/her earnings from the date of the change. For further information regarding what is meant by a change of income source refer to Chapter 77, Direct Taxation, paragraph 77.23, Nil tax codes and Chapter 77, Direct Taxation, paragraph 77.35,Taxation in the year a bankruptcy order is made. The bankrupt also becomes liable for tax again on any income received from the start of the tax year following the year in which bankruptcy occurs.
The NT coding provision is not applied specifically to benefit the bankrupt by increasing his/her income. Instead, where a bankrupt is in PAYE employment, HMRC has to put itself in to the same position as would have been the case if the bankrupt had been self-employed (and not subject to PAYE), where tax would have been due at the date of the bankruptcy order. The NT code is therefore applied by HMRC where bankrupts are in employment, to ensure that the taxation of all individuals is dealt with on an equal basis.
It has been agreed that electronic notification of the bankruptcy order (see paragraph 31.7.14) will cause the local tax office dealing with the bankrupt taxpayer’s affairs to identify where appropriate cases where the nil tax (NT) code will be applied, the application of the NT coding is not dependant on any manual notification from the official receiver to the tax office.
The monies refunded as a result of the application of the NT code are a direct consequence of the making of the bankruptcy order and should therefore be available for the benefit of the bankruptcy estate. Where the NT code is expected to be applied before the end of the tax year, the additional income arising as a result of the application of the NT coding can be included when calculating the bankrupt's surplus income from which contributions can be collected under an IPA.
It also possible that the increased income available to the bankrupt as a result of the application of the NT coding can in itself provide the basis for an IPA/IPO, even where the bankrupt does not have sufficient surplus for an IPA/IPO from his/her usual net income. Where the bankrupt has signed the TNIDIS form an IPA should be sought in preference to an IPO to claim the surplus income. In this instance an IPA would be agreed based solely on the additional income created by the NT coding, where the bankrupt agrees to IPA contributions equivalent to the amount of tax that he/she would otherwise have paid.
In all cases, Section 310(2) [note 10] must still be taken into account when considering whether an IPA is viable to cover the period of the NT tax coding, to ensure that the bankrupt and his/her family are left with sufficient funds for their reasonable domestic needs. It may be that in very rare circumstances it will not be appropriate to require the bankrupt to consent to an IPA to collect the additional income resulting from the NT coding, if the bankrupt can demonstrate that this would cause him/her to experience financial hardship.
The IPA which includes the income arising as a result of HMRC applying the NT coding should be drafted so that when HMRC recommences tax deductions from the bankrupt's income, the amount payable can be reduced accordingly or the agreement can be made such that the NT element of the IPA will only be collected during the period during which the NT coding takes effect.
Where an NT IPA has been agreed and the bankrupt has signed the Tax and National Insurance Disclosure Authority (form TNIDIS) this can be forwarded to the local tax office with form IRNTC to request that HMRC forward notice of the NT coding to the official receiver's agents to enable them to commence collection of the NT IPA. (See also Case Help Manual part Income Payments Agreements vi "NT" tax code income payments agreements and income payments orders).
With NT IPOs, there was a time problem in that where the bankruptcy order was made after the end of November of the tax year in question, it could be difficult to obtain the court order for the IPO quickly enough to merit such a course of action but this need not be the case with an IPA. When deciding whether an IPA is appropriate in order to collect surplus income arising as a result of the application of the NT coding, consideration should be given to the amount of tax the bankrupt pays each month and the time the local tax office is likely to take to implement the NT coding.
In practice, it can take some time to implement the NT code and the bankrupt will then receive the overpayment of tax as a refund at the end of the tax year. Where such a tax refund arises due to delays in adjusting the bankrupt's tax code, it should be claimed by using the bankrupt’s duly completed authority TNIDIS which authorises the payment to the official receiver/trustee of income tax refunds payable for any year up to and including the tax year in which the bankruptcy order was made. The tax refund must not be claimed as after-acquired property.
HMRC have confirmed that the application of the NT code to a bankrupt's income will not have any impact on a bankrupt's claim for working tax credits. Tax credits will continue to be paid at their existing rate regardless of the application of the NT coding unless the circumstances of the claimant (bankrupt) change (other than the application of the nil tax code). See Chapter 77, Direct Taxation, Part 7, Tax Credits, for further information.
For further information regarding tax and nil tax coding etc. see :
*
Chapter 77, Direct Taxation, paragraph 77.23, Nil tax codes, & Chapter 77, Direct Taxation, paragraph 77.35, Taxation in the year a bankruptcy order is made.
*
Case Help Manual part Tax Refunds
*
HMRC provides a useful website concerning tax and self assessment at www.hmrc.gov.uk
31.7.16 Income received from spouse/civil partner/partner
It is reasonable to expect that within the household of the bankrupt and his/her family, the income received by a working spouse/civil partner/partner (all referred to as "partner" for the remainder of this section) or a partner who receives income from other independent means, will be used to contribute to the household expenditure in some way, for example by purchasing food, clothing for him/herself and any children, etc. The bankrupt may genuinely not know his/her partner’s income and/or the partner may not be willing to disclose it to the official receiver as they are not personally subject to the proceedings. Legal advice has been received that it is not a proper use of section 366 [note 11] to have a partner privately examined for the purpose of obtaining details of his/her income to establish whether an IPO may be obtained or the level of that order and there is no reason why this should not extend to cover IPAs.
Where resistance to the disclosure of the partner's income is encountered, in the absence of any information to the contrary, it is appropriate for the official receiver to assume that the working partner pays for 50% of all household expenditure. This amount can then be incorporated into an IPA/IPO calculation to assist the official receiver's decision as to whether the bankrupt has sufficient surplus income against which an IPA/IPO can be obtained. It is likely that an assumption of this nature will provoke a response from the bankrupt and/or their partner and if the required information is then forthcoming, the official receiver may re-calculate the income and expenditure of the bankrupt taking in to account the information provided with regard to the actual contribution of the partner, to establish whether the bankrupt has surplus income available for an IPA/IPO. Flexibility will be required in any re-assessment, especially where the partner works part-time.
As with state benefits which supplement earned income, whilst it is acceptable to include the income of the bankrupt's partner as part of the total income received in to the household of the bankrupt, it should be noted that an IPA/IPO claim can only be made against the surplus arising from the bankrupt's income. Any calculation of surplus income for the purpose of obtaining an IPA/IPO should work out the surplus available having assessed total income and total expenditure of the bankrupt and his/her household, then proportion the extent of any total surplus arising against the income contributed by the bankrupt. The Income Payments Calculator available on the Technical Section intranet site may assist in proportioning the bankrupt's share of any surplus when assessing an IPA/IPO.
31.7.17 Income from adult children and other adult members of household
In the same way as it is reasonable to expect a working spouse/civil partner/partner to contribute to the income covering household expenditure (see paragraph 31.7.16), it is also reasonable to expect that where adult children or other adult members of the household such as an elderly relative have an income, they will contribute to the household expenditure, if only to cover the cost of their food. Any contribution thus received should therefore be assessed against household expenditure within the IPA/IPO calculation, but it must be noted that an IPA/IPO claim can only be made against the surplus arising from the bankrupt's income.
31.7.18 Expenditure - maintaining a consistent approach
The official receiver/trustee must maintain a consistent approach when considering the expenditure claimed by the bankrupt, and must also ensure that the expenditure items allowed in any IPA/IPO calculation are sufficient to ensure the reasonable domestic needs of the bankrupt and his/her family are met within that expenditure.
The official receiver/trustee may not be satisfied that the expenditure figures provided by the bankrupt are reasonable, but may also be unable to verify the expenditure where invoices/bills etc, cannot be made available. Where the official receiver/trustee still considers that the bankrupt may have sufficient surplus income for an IPA/IPO to be obtained, reference should be made to the Family Expenditure Survey, available on the Technical Section intranet page, which provides guidance regarding the average monthly expenditure of different households across the UK based on annual government statistics. The information contained within the survey provides comparison figures for households of various compositions, and can assist the official receiver/trustee in deciding whether the outgoings recorded by the bankrupt for him/herself and family are reasonable when compared with the known averages for similar households. The Income Payments Calculator available on the Technical Section intranet site, also provides assistance in calculating expenditure and whether, after assessing reasonable expenditure, the bankrupt is in receipt of sufficient surplus income to be able to contribute to an IPA/IPO.
31.7.19 Expenditure items which can be allowed
The following provides a general list of expenditure items which can be included in addition to basic domestic expenditure when making an IPA/IPO calculation to establish whether the bankrupt has surplus income:
*
TV licence
*
Household and car insurance
*
Car tax
*
AA/RAC or similar motoring assistance club membership
*
Membership of professional body required in order to carry out employment (unless paid by employer)
*
Hire of TV and/or DVD/video player (no more than one of each appliance per household)
*
Prescription charges - see paragraph 31.7.20
*
Dental and optical treatment - see paragraph 31.7.21
*
Mobile phone costs - see paragraph 31.7.22
*
Dry cleaning costs - see paragraph 31.7.23
31.7.20 Prescription charges
Where the bankrupt is liable to pay for prescriptions and is claiming for multiple item monthly prescription charges, the official receiver/trustee should assess whether the costs claimed are in excess of the average monthly prescription costs available under either a six-month or annual pre-payment certificate. These prepayment certificates can provide a considerable reduction in the monthly cost of prescriptions where an individual has to pay for more than five prescription items in four months or 14 items in 12 months.
For further information concerning pre-payment certificates see also:
http://www.ppa.org.uk/ppa/ppc_intro.htm
http://www.dh.gov.uk/PolicyAndGuidance/MedicinesPharmacyAndIndustry/Prescriptions/NHSCosts/fs/en
31.7.21 Dental and optical treatment
Where the bankrupt can demonstrate to the satisfaction of the official receiver/trustee that he/she has no NHS dental service practically available to them (for example where they live and/or work in a remote area), this type of expenditure may include items such as a dental payment plan for treatment at a privately run dental practice, however this should only be considered where there is no practical NHS alternative.
31.7.22 Mobile phone costs
Costs must be reasonable. It may be necessary to disallow part of the monthly amount claimed if the claim is above average and the calls made can be shown to be predominantly social. Where the bankrupt uses the mobile phone for business calls, the official receiver should establish whether the bankrupt's employer provides re-imbursement for this usage (or if self-employed, whether the bankrupt claims expenses for this usage from the business additional to any other drawings/income they have already declared) , and either include the re-imbursement as additional income to off-set against the total expenditure claimed, or simply disallow the work-related portion of the claim for mobile phone usage (the same principle could also be applied where a bankrupt uses their landline home telephone for business as well as personal calls). Where the bankrupt claims that use of a mobile phone is essential, but costs claimed have been reduced or disallowed by the official receiver/trustee in the IPA/IPO calculation, it is up to the bankrupt to consider whether a "pay as you go" scheme would provide a cheaper alternative to their existing arrangement. Where the bankrupt is still in receipt of ongoing services under contract at the date of bankruptcy, the official receiver/trustee should give notice to the mobile phone service provider that he/she does not wish to adopt the contract previously held by the bankrupt. Where a penalty is incurred arising from early termination of the contract this should be included as a debt in the bankruptcy proceedings. (See also paragraph 31.7.35)
31.7.23 Dry cleaning costs
If the official receiver/trustee considers the amount claimed in this regard is excessive, further explanation should be sought from the bankrupt and a more reasonable allowance included if the bankrupt cannot justify the original amount claimed.
31.7.24 Other expenditure items to be considered
Outgoings assessed must be realistic and should cover the actual expenditure required to provide for the reasonable domestic needs of the bankrupt and his/her family. It may be necessary when examining the figures provided by the bankrupt to consider other areas of expenditure which the bankrupt may not have included, but which are necessary for meeting their reasonable domestic needs. Some bankrupts may find it difficult to assess the outgoings of themselves/and or their family where the expenditure is sporadic (e.g. buying school uniforms) or prior to bankruptcy they have not been in a position to meet their reasonable domestic needs as a result of other pressing debt repayments.
In these circumstances it may be necessary for the official receiver/trustee to refer to average expenditures in order to calculate the realistic outgoings required to meet the reasonable domestic needs of the bankrupt and his/her family.
The following suggested areas cover other types/amounts of expenditure claimed by the bankrupt which may need careful consideration when making an IPA/IPO assessment.
*
Clothing - see paragraph 31.7.25
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Holidays - see paragraph 31.7.26
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Hairdressers - see paragraph 31.7.27
*
Extra curricular activities for children - see paragraph 31.7.28
*
After school clubs - see paragraph 31.7.29
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Pets - see paragraph 31.7.30
*
Rent arrears - see paragraph 31.7.31
*
Maintenance payments - see paragraph 31.7.32
31.7.25 Clothing
An allowance for the necessary replacement of clothing should be included in the IPA/IPO calculation. What is reasonable will depend on the individual circumstances of the bankrupt and his/her family. For example, families with young children or families where any member of the household suffers from a debilitating and/or chronic medical condition, may require a higher allowance for clothing than the average amount recorded for similar sized households in the Family Expenditure Survey, if they are to meet their reasonable domestic needs. The nature of the bankrupt's employment and clothing requirements arising should also be considered. e.g. whether he/she is required by his/her employer to fund specialist clothing or smart clothes. In general, where the bankrupt is claiming an amount for clothing in excess of the figure relevant to their family circumstances in the Family Expenditure Survey, they should be asked to explain why they require the extra allowance and provide evidence to support their claim.
31.7.26 Holidays
Previous guidance stated that an allowance for holidays should not be included in the calculation of funds available for an income payments contribution, other than in exceptional circumstances, for example where a dependant was sick or disabled. Whilst extravagance is not endorsed in this respect, it may be considered a reasonable domestic need to allow the bankrupt and his/her family to benefit from a non-extravagant holiday as a break from routine. Expensive or luxury holidays (particularly if the holiday is abroad) are likely to cause offence to creditors but an allowance of between £60-£80 per month (amounting to £720-£960 per annum) for a household of 4 people should allow the bankrupt and his/her family sufficient funds to take a moderate annual holiday. Should the bankrupt consider this allowance insufficient to fund a holiday, he/she should be informed that any additional holiday cost that he/she may wish to incur must be funded from the amount of surplus income left with him/her after deduction of the assessed IPA/IPO contribution.
31.7.27 Hairdressers
It is reasonable to allow a monthly allowance up to £10 per adult and £3 per child to pay for hairdressing requirements, but any expensive hair treatments must be funded from the surplus income remaining with the bankrupt after deduction of the assessed IPA/IPO contribution.
31.7.28 Extra curricular classes/activities for children
Whilst it can be considered reasonable to allow expenditure to be claimed by the bankrupt to fund one extra-curricular activity per dependant child, any claim for additional extra-curricular classes/activities should be funded by the bankrupt from any surplus remaining with them after deduction of the assessed IPA/IPO contribution.
31.7.29 After school clubs
An expenditure claim for after school clubs can be allowed if they are used to provide childcare whilst parents are working. If the use of the club (s) is simply a matter of convenience for the bankrupt and/or his/her spouse/civil partner/partner the bankrupt should be informed that the cost of funding the club (s) must be funded from the amount of surplus income left with him/her after deduction of the assessed IPA/IPO contribution.
31.7.30 Pets
Pet food/care should, in general, be included as part of the family housekeeping expenditure when making an income payments calculation. If the bankrupt has not included the cost of caring for a pet within the housekeeping expenditure then an allowance of up to £20 per month can be included for the care of all family pets. Should the bankrupt maintain above average numbers of pets, or exotic pets requiring specialist food/care, he/she should be informed that the additional cost of funding the pet(s) must come from the amount of surplus income left with him/her after deduction of the assessed IPA/IPO contribution.
31.7.31 Rent arrears
In a recent unreported Court of Appeal hearing, [note12] the Court of Appeal held that the right of a landlord to recover his/her property from a defaulting tenant, irrespective of whether the landlord does or does not require a court order to do so, is not affected by bankruptcy.
The Court of Appeal case concerned the situation where a possession order had been obtained against a tenant in respect of rent arrears by the relevant District Council. The possession order was then suspended when the tenant agreed to pay current rent plus an amount to discharge the arrears. Subsequently the tenant was declared bankrupt and the Court of Appeal did not dispute that rent arrears outstanding at the date of bankruptcy became a provable debt in the bankruptcy proceedings.
However, the Court of Appeal determined that the possession order was not a remedy against the property or person of the bankrupt and therefore was not restricted by the provisions of the Insolvency Act section 285 (3) (with reference to earlier cases of Ezekial v Orakpo [1977] QB 260 [note 13] and Razzaq v Pala [1997] BPIR 726 [note 14] ). The Court of Appeal made it clear that the local authority might have sought possession of the property both before and after the date of the bankruptcy order.
The consequence of this is, where a possession order is made in respect of rent arrears, the court may suspend that order on the condition that the rent arrears will be discharged over a period of time. Where the individual concerned is an undischarged bankrupt then it is anticipated that any amount ordered by the court to discharge the rent arrears would be taken in to consideration when assessing the individual's ability to make payments under an income payments agreement/order.
31.7.32 Maintenance payments
An obligation arising under an order made in family proceedings or under a maintenance assessment made under the Child Support Act 1991 is not a debt provable in bankruptcy [note 15]. It is a continuing obligation, payable out of income.
Where a bankrupt continues to receive income after the bankruptcy order has been made, the official receiver or trustee in bankruptcy may consider an IPA under section 310A of the Insolvency Act 1986 for the benefit of the bankrupt's estate. When making an IPA/IPO assessment the official receiver or trustee must consider the provisions of section 310(2) [note 16]. For further information regarding reasonable domestic needs see also paragraph 31.7.4 .
Section 310(2) expressly prohibits a court from making an IPO which would have the effect of reducing the bankrupt’s income below that which appears to the court to be necessary for meeting the reasonable domestic needs of the bankrupt and his family. The term "family" is restrictively defined for this purpose in section 385(1) of the Insolvency Act 1986 as meaning the persons (if any) who are living with the bankrupt and are dependent on him (or her).
In practice, a spouse/civil partner/partner or former spouse/civil partner/partner may be in receipt of a maintenance order, but not living with the bankrupt, and an assessment may have been made under the Child Support Act in respect of children not living with the bankrupt. In these circumstances the obligations of the bankrupt arising from any such order or assessment would not have to be included as reasonable domestic needs of the bankrupt’s "family" to comply with the provisions of section 310(2) because the term "family" is defined in section 385(1) [note 17] as encompassing only dependants living with the bankrupt. However, when assessing the bankrupt's ability to pay under an IPO, the court has previously held that such obligations are reasonable demands upon a bankrupt’s income and has taken full account of the obligations arising from a maintenance order or a Child Support Agency assessment such that it would not make an order for an amount which would limit a bankrupt’s ability to meet those obligations [note 18].
For this reason the amount payable by a bankrupt under a maintenance order or Child Support Agency assessment should be taken into account when calculating the amount which a bankrupt is able to pay under an IPA, but should be identified as a separate item.
An simple explanation regarding the provisions of the Child Support Act and the formula used to calculate maintenance payments can be found at :
http://www.divorce.co.uk/legal/englandwales/legalcloserlook/finance/commonissues/childsupportact.htm
More detailed information concerning the child support agency and maintenance calculations can be found at http://www.csa.gov.uk/
31.7.33 Expenditure items which should NOT be allowed
The following provides a general list of expenditure items which should not be included when making an IPA/IPO calculation, unless the bankrupt can prove there are extenuating circumstances:
*
Gym membership
*
Sports expenses or club membership
*
Additional pension contributions to enhance a pension
*
Private healthcare insurance or similar (however see also paragraph 31.7.21)
*
Social and entertainment expenses- see paragraph 31.7.34
*
Satellite TV - see paragraph 31.7.35
*
Broadband internet costs (unless shown to be necessary for the bankrupt's paid employment) - see paragraph 31.7.35
*
Excessive mortgage payments - see paragraph 31.7.36
*
Student Loans - see paragraph 31.7.37
*
Regular payments to charitable and religious organizations/tithing - see paragraph 31.7.38
31.7.34 Social and entertainment expenses
No allowance should be included in the IPA/IPO calculation for items such as cigarettes, alcohol, recreational drugs, betting etc. As with additional holiday funds, (see paragraph 31.7.26) social and entertainment expenses should be funded from the amount of surplus income left with the bankrupt after the deduction of the assessed IPA/IPO. Only in exceptional circumstances should the official receiver/trustee allow any flexibility concerning these expenses, where other outgoings claimed by the bankrupt do not sufficiently provide for the reasonable domestic needs of the bankrupt and his/her family
(see paragraph 31.7.4 & paragraph 31.7.6).
31.7.35 Satellite TV and broadband internet contracts
Ongoing contracts for the supply of goods and services which remain extant at the date of bankruptcy vest in the trustee of the bankruptcy estate. Where the bankrupt is still in receipt of ongoing services under contract at the date of bankruptcy, notice should be given by the official receiver/trustee to the service provider stating that he/she does not wish to adopt the contract and services provided under the contract should cease. This includes contracts for satellite TV or broadband internet connection, where the bankrupt has signed up to the agreement for a set period which cannot be terminated without a penalty being incurred. Any penalty for early cancellation should be included as a debt in the bankruptcy proceedings.
NB: With the advent of combined telephone and internet packages available via broadband (where telephone services are provided free or at a reduced rate as a result of the broadband service provision), the official receiver should consider whether the expenditure claimed for these combined services may in fact be equal to or less than the cost of a traditional land line only telephone service, which would be considered a reasonable domestic need. However, the need to notify the service provider regarding non-adoption of the contract must still be taken in to account by the official receiver/trustee.
See http://www.broadband-options.co.uk/index.php?tracker=msn for information concerning services provided under various broadband supplier contracts.
31.7.36 Excessive mortgage payments
Mortgage payments may be extremely high where the home is heavily mortgaged and/or when arrears of mortgage payments are having to be met.
Where the bankrupt is making the entire mortgage payment against a property which is jointly mortgaged, and no contributions are being made by third parties, the official receiver should take this into account when assessing the bankrupt’s capacity to make payments under an IPA and "disallow" a fair share of the payments being made in respect of the joint liability.
If the official receiver’s income payments calculation taking in to account allowable reasonable expenditure, suggests that the bankrupt has sufficient surplus to collect under an IPA/IPO but the bankrupt wishes to continue making excessive payments and/or payments on behalf of third parties without receiving any contribution from them, the official receiver may consider whether to apply for an income payments order against the bankrupt rather than an IPA, following the judgment in Albert v Albert (A Bankrupt) (1996) BPIR 232 [note 19]. The official receiver must report the full facts to the court to allow the court to decide whether the bankrupt's claim that the expenditure is reasonable should be allowed. (See paragraphs 31.7.19 and 31.7.24 for further information). There is no case for allowing the pursuit of IPAs that will lead to the bankrupt becoming homeless.
Where suitable (not necessarily equivalent) rented accommodation is available at less than the cost of the mortgage payments, a view will need to be taken by the official receiver as to whether for the purpose of assessing the bankrupt's real disposable income an amount equivalent to the rented accommodation is allowed rather than the total mortgage repayment amount claimed by the bankrupt. A hard and fast rule cannot be set down as to what is excessive due to regional variations in the costs and availability of rented accommodation. Also, it is likely that a deposit will be required to be paid when "going in" to a rented property which may prevent this course of action. As a result of the requirement to pay a deposit when entering a rental contract, it may be necessary to delay the commencement of an income payments agreement to enable the bankrupt to accumulate the necessary funds, this action in the long term being beneficial to the estate by increasing the funds available to be paid later under the IPA. However, any delay in commencement of the IPA must take in to account the fact that the IPA has to be signed by the bankrupt and the official receiver/trustee prior to the date of discharge, as detailed at paragraph 31.7.2.
Where, at the date of the bankruptcy order, the bankrupt is living in rented accommodation but is also renting out a property in which he/she has a beneficial interest, the official receiver/trustee should realize the beneficial interest as an asset of the bankruptcy estate immediately and in the meantime include rental income received by the bankrupt in the IPA/IPO calculation (see paragraph 31.7.13). The official receiver will need to consider whether it is reasonable to include both expenditure for mortgage repayments and rental costs when assessing the bankrupt's expenditure. Where the official receiver or trustee has sought to disallow part of the mortgage repayments claimed by the bankrupt and an IPA cannot be agreed as a result, the official receiver or trustee may consider applying for an IPO.
31.7.37 Student Loans
When considering the income and expenditure of a bankrupt who, at the date of bankruptcy is still liable to repay a student loan, the official receiver/trustee will need to establish whether the outstanding student loan is provable in bankruptcy and whether during the period of the IPA/IPO, the loan, or any part of it, will become repayable if it is not a provable debt in the bankruptcy.
Chapter 40, Creditors and liabilities, paragraph 40.24 explains fully the differences between student loans which are provable and those which are not, but in summary, in all bankruptcy cases where the order was made on or after 1 September 2004, all outstanding student loans are not provable debts and thus are not released on a bankrupt's discharge from bankruptcy. Where the order was made on or after 1 July 2004, all student loans made under the Education (Student Loans) Act 1990 (often referred to as mortgage style loans) were also made non-provable in bankruptcy with the consequence that they were also not released on discharge. Where the bankrupt's student loan liability falls in to the category of a non-provable debt and the bankrupt is required to make repayment against that debt during the period of an IPA/IPO, this is an expenditure which needs to be included in any IPA/IPO calculation (however see also deductions for loan repayments under the Teaching and Higher Education Act 1988 below).
Where bankruptcy occurred before these dates, student loans may be treated as provable debts in the bankruptcy and are released on discharge.
In the case of loans made under the Teaching and Higher Education Act 1988 (often referred to as income contingent loans), repayments are likely to be made through the operation of the PAYE scheme. Where an employer is served with an IPA/IPO and the employee is liable to have student loan deductions taken at source from his/her earnings, the employer should continue to make the student loan deductions for the period during which the IPA/IPO applies. As the IPA/ IPO assessment is made on the basis of take home pay, and the student loan repayment under the Teaching and Higher Education Act 1988 will have already been deducted at source, in this instance student loan repayments should not be included as an expenditure in the IPA/IPO calculation.
It should also be noted that where a bankrupt is in receipt of a student loan this is not income which can be claimed under an IPA/IPO.
31.7.38 Regular payments to charitable and religious organizations/tithing
Where it has been the practice of a bankrupt to make a regular monthly payment from his/her income to a charity or church/religious organization, which may represent a tenth of the bankrupt's income hence the term tithing (meaning a tenth part), this expenditure should not be included in the IPA/IPO calculation. Should the bankrupt still wish to maintain a regular donation of this kind, as with other disallowed expenditure he/she will have to fund this expenditure from the amount of surplus income left with him/her after deduction of the assessed IPA/IPO contribution.
31.7.39 Early discharge income & expenditure review
The early discharge provisions introduced by EA 2002 mean that in cases where the order was made on or after 1 April 2004, the official receiver may cause the 12 month period of discharge to be reduced by filing notice 6.82 at court stating that the investigation of the conduct and affairs of the bankrupt is unnecessary or concluded. This process can only be started 3 months after the report to creditors is issued. After the 3 months have lapsed and no responses have been received from the creditors, the official receiver will issue a formal letter to the creditors notifying them that he/she intends to file the early discharge notice at court. If the creditors do not respond to the letter with full details within 28 days, the official receiver may file the notice at court.
In early discharge cases where there is no IPA or IPO, before the official receiver files notice at court, the bankrupt should be issued with a form EDREV enclosing form IPOQ requesting details of income and expenditure, form IPOQ to be returned within 14 days. If the bankrupt does not complete the form and return it within 21 days, or if the form is submitted outside of 21 days but the bankrupt's explanation for late submission is not accepted, his/her conduct will be considered non co-operation. However, without any other additional matters of non co-operation, failure to return the form will not be sufficient to justify application to suspend discharge. The bankrupt's failure to co-operate will however mean that the early discharge process will not be pursued and the bankrupt will have to wait the full 12 months before obtaining discharge.
If the form IPOQ is returned within 21 days/returned after 21 days but the explanation for the delay is deemed acceptable, and the form reveals a change in circumstances whereby the bankrupt now appears to have surplus income from which to make a contribution, the official receiver may still consider setting up an IPA, using the guidelines contained in paragraphs 31.7.6 to 31.7.38 . The time constraint for setting up an IPA must be remembered, as the IPA cannot be implemented once the bankrupt has been discharged (see paragraph 31.7.2). The IPA must be agreed before the official receiver takes any further action regarding early discharge. Case Help Manual part Income Payments Agreements paragraph xi, Income review in early discharge cases, provides full details as to the practical application of the early discharge procedure following the bankrupt's submission of an accepted IPOQ.
In some circumstances it may not be necessary for the official receiver to review the bankrupt's income. If the bankrupt's only source of income is disability benefit or a state pension for example, and the situation is likely to remain unchanged, there is no point in carrying out the review procedure and the official receiver may, in such cases, pursue early discharge without it.
See also :
Technical Manual Chapter 22 - Discharge
Case Help Manual part Income Payments Orders, paragraph xiii, Income review in early discharge cases
Case Help Manual part Discharge from bankruptcy
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