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| Debtdummy |
Posted - 23 March 2007 : 17:39:30
Part 7- IPOs ASSESSMENT OF REAL DISPOSABLE INCOME
December 2006
31.7.59 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 or main 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, it is envisaged that the bankrupt's consent to an IPA will be sought in preference to an IPO, based on the "real disposable income" that is available.
An IPA can be obtained by the official receiver when he/she is receiver and manager and/or when the official receiver/insolvency practitioner is appointed trustee of the bankrupt's estate. An IPO can only be applied for by the official receiver or an insolvency practitioner, when he/she is acting as trustee.
For information regarding obtaining IPAs see Part 1 of this chapter.
Where an IPO is being pursued and the bankrupt has other assets which may warrant the appointment of an insolvency practitioner at a meeting of creditors, the official receiver should continue with the necessary procedure to apply for the IPO at the earliest opportunity and should not neglect to secure any payments received under the IPO pending the appointment of an insolvency practitioner. Where the IPO is the only or principal asset, once the IPO is effective the continued administration of payment collection and monitoring should be dealt with by the appropriate RTLU. (See also Case Help Manual part Income Payment Orders, paragraph ix, Cases to go to RTLUs)
31.7.60 Income sources and expenditure items which can and cannot be included in income payments calculation
When considering various sources of income available to the bankrupt in an IPA/IPO calculation reference should be made to paragraph 31.7.7 and the paragraphs listed below. When considering whether the bankrupt's expenditure in any income payments calculation is reasonable (allowing for the reasonable domestic needs of the bankrupt and his/her family) reference should be made to paragraph 31.7.18 and the paragraphs listed below. This guidance is applicable to both IPAs and IPOs and can be used in conjunction with the Family Expenditure Survey and Income Payments Calculator on the Technical Section intranet page.
Specific details of the relevant paragraphs are as follows :
(a) Income Sources :
*
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 for general guidance applicable and paragraph 31.7.61 for specific information relating to IPO application.
*
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
(b) Expenditure items which can be included :
*
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
(c) Other expenditure items to be considered:
(see also paragraph 31.7.24)
*
Clothing - see paragraph 31.7.25
*
Holidays - see paragraph 31.7.26
*
Hairdressers - see paragraph 31.7.27
*
Extra curricular activities for children - see paragraph 31.7.28
*
After school clubs - see paragraph 31.7.29
*
Pets - see paragraph 31.7.30
*
Rent arrears - see paragraph 31.7.31
*
Maintenance payments - see paragraph 31.7.32
(d) Expenditure items which should NOT be allowed
(see also paragraph 31.7.33)
*
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
If it has not been possible to agree an IPA with the bankrupt but an analysis of their income and expenditure shows that the bankrupt has surplus income (having taken into account the guidance at Part 2 and the reasonable domestic needs of the bankrupt and his/her family ) it should be remembered that an IPO can only be applied for by the official receiver when he/she is acting as trustee, or an insolvency practitioner, when he/she is acting as trustee
31.7.61 Income arising from nil tax (NT) coding
Following the making of a bankruptcy order HM Revenue and Customs (HMRC) 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 tax outstanding 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.
See paragraph 31.7.15 for guidance applicable to both IPAs and IPOs when considering the inclusion of additional income arising from the application of the NT coding in the income payments calculation.
As with an IPA based on the extra income arising as a result of HMRC applying the NT coding, an IPO which includes or is based solely on the extra income arising as a result application of the NT coding should be set up so that when HMRC recommences tax deductions from the bankrupt's income, the amount payable is reduced accordingly or the order comes to an end.
When dealing with an IPO to collect surplus income arising either solely as a result of the application of the NT coding or where an IPO calculation includes income arising from application of the NT coding, theoretically the application to court should only be made once confirmation has been received from HMRC that the NT code is in operation. However, the IPO application (form IPORAC) may be made before this confirmation is received if the wording of the application and the bankrupt's informal consent state in clear terms what is being claimed both in terms of the source of the money and an estimated amount.
Where 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 IPO once the court order has been obtained.
In cases where it has not been possible to agree an IPA to recover the extra income arising from application of the NT code, and the bankruptcy order was made between 6 April and the end of November, there should be sufficient time to obtain an NT code IPO. If the IPO is based only on the NT tax coding, in cases where the order is made after the end of November, the official receiver should assess whether it is worth making the application to court. The decision should be based on the following:
1. the amount of tax the bankrupt pays each month;
2. the time the local HMRC office takes to implement the NT code;
3. the time it takes to process an IPO in the local court;
4. the cost of making the application, such as the court fee, and the potential benefit to the estate.
The official receiver may consider it is worth continuing with the IPO application if the bankrupt pays a large amount of tax each month, even if only for one or two months of payments. It is anticipated that in the majority of cases however, the resources used in obtaining an IPO and the likely surplus available for collection will make it unrealistic to obtain a court order for a short period.
If the official receiver is replaced as trustee by an insolvency practitioner before the bankrupt’s tax code is adjusted, it will be a matter for the insolvency practitioner trustee to take the matter forward with regard to obtaining an IPA/IPO to recover the surplus income arising as a result of the application of the NT code. Where a tax refund arises due to delays in adjusting the bankrupt’s tax code, the tax refund should be claimed by using the bankrupt’s duly completed Income Tax and National Insurance disclosure authority form 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. If the bankrupt fails to agree an 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 1]. See also paragraph 31.7.14, 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.
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 alerts them to apply the Nil Tax (NT) coding to the bankrupt's income as appropriate.
31.7.62 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 2]. It is a continuing obligation, payable out of income.
Where a bankrupt continues to receive income after the bankruptcy order has been made, the trustee in bankruptcy may apply to the court under section 310 of the Insolvency Act 1986 [note 3] for an IPO for the benefit of the bankrupt’s estate. This section gives the court a wide discretion as to what, if any, order to make, but in considering whether to make an IPO a court is bound to take in to account the provisions of section 310(2). When making an IPO assessment the official receiver or trustee must also consider the provisions of section 310(2).[note 4] For further information regarding reasonable domestic needs see 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/her family. The term "family" is restrictively defined for this purpose in section 385(1) of the Insolvency Act 1986 [note 5] 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 6] as encompassing only dependants living with the bankrupt.
When considering whether to make an IPO, the court has previously held that [note 7] such obligations can be considered reasonable demands upon a bankrupt’s income and has taken full account of a bankrupt’s obligations arising from a maintenance order or a Child Support Agency assessment in the exercise of its discretion, such that it would not make an order for an amount which would limit a bankrupt’s ability to meet those obligations.
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 IPO, but should be identified as a separate item.
The position where maintenance proceedings are brought against a bankrupt after the making of a bankruptcy order, and no application has been made under section 310, was considered in the Court of Appeal case of Albert v Albert (A Bankrupt) (1996) BPIR 232. [note 8]
In that case it was held that an application by a trustee in bankruptcy for an IPO would not be prejudiced or affected by the making of an order by the family court for periodical payments by the bankrupt to his wife. The Court of Appeal upheld the decision of the judge at first instance to refuse an application made by the trustee in bankruptcy for a stay of those proceedings which had been made on the ground that this was necessary in order to protect the trustee in bankruptcy's interest against the risk of the family court making an order for periodical payments. The Court held that the application brought by the trustee in bankruptcy was entirely misconceived because the amount of a bankrupt's income "...will be affected by any Order that the Insolvency Court has made, or may subsequently make, which has the effect of diverting the bankrupt’s income in or towards payment of his creditors. The Family Division is concerned with the division of the cake, but the size of the cake is liable to be diminished by any Order made by the Insolvency Court".
For this reason the official receiver should only consider making an application to the family court for a stay of the proceedings pending the result of an application for an IPO after receiving advice from a solicitor (funded from the bankruptcy estate or by one or more of the creditors). See Chapter 33, Bankrupt's interest in the family home, Part 3, regarding orders in matrimonial proceedings.
It should also be noted that in the same case the Court of Appeal held that unless the trustee in bankruptcy was able to identify any question or issue which ought, as a matter of justice or convenience, to be determined by the family court as between either of the parties to the proceedings and the trustee himself, then there was no jurisdiction for the court to order the trustee in bankruptcy to be joined in proceedings for ancillary financial relief. Although it is possible, with the leave of the court, for a trustee in bankruptcy to seek to be joined as a party to proceedings without this requirement being fulfilled, the official receiver should only consider making such an application after taking legal advice.
In the event that the court subsequently makes a maintenance order against a bankrupt and does not take full account of the amount of an IPO, it is possible that the amount payable under the IPO will need to be reduced to take some account of the maintenance commitment. In these circumstances the bankrupt should be asked to make this application to the court, to vary the IPO (see also paragraph 31.7.32).
31.7.63 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.
The judgment in Malcolm v Official Receiver [1999] BPIR 97 [note 9] considers the possibility of obtaining an IPO against a bankrupt who may not have an obvious surplus of income over expenditure because the mortgage payments made by the bankrupt are excessive and/or the payments are being made by the bankrupt on behalf of himself/herself and one or more other persons with separate income(s) who might be expected to make some contribution towards the mortgage payment.
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 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 still be able to obtain an income payments order against the bankrupt following this judgment or 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 10] (see paragraph 31.7.62).
The official receiver must report the full facts to the court to allow the court it to decide whether the bankrupt's claim that the expenditure is reasonable should be allowed. There is no case for allowing the pursuit of IPOs 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 order 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 IPO.
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 both 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.
Wherever possible the official receiver should encourage the bankrupt to attend the IPO application hearing, particularly where the effect of such an order might mean that the bankrupt can no longer meet the mortgage commitment, which may lead to the sale of the property. The bankrupt's attendance will allow the court to hear his/her views and possible proposals for dealing with the situation, which may include a voluntary sale of the property (see also paragraph 31.7.6).
31.7. 64 Calculation of contribution to be claimed under an IPO
Once the real disposable income has been assessed, i.e. the income remaining after all expenditure necessary to finance the reasonable domestic needs of the bankrupt and his/her family (see Part 2 of this chapter), 50-70% of this should be sought by way of monthly payments under an IPA. Generally, the higher the real disposable income, the higher the percentage which should be sought. Guidance as to what amount is appropriate is provided in the Income Payments Calculator (available on the Technical Section intranet page) and Technical Notice 31/03 Annex 2 - IPO/IPA Table.
The official receiver/trustee may be able to make an initial calculation of surplus income based on the debtor's statement of affairs/ information in the preliminary information questionnaire. To assist in calculating the proposed IPA/IPO contribution, reference can be made to Family Expenditure Survey and Income Payments Calculator (on the Technical Section intranet page) into which relevant income and expenditure can be entered. See also Part 2 of this chapter and Technical Notice 31/03- Annex 2 IPO/IPA Table. Whilst the guidance is provided to assist in ascertaining an appropriate contribution under an IPA/IPO, it must be remembered that each bankrupt's case must be considered on its own merits, taking in to account all available information with regard to the individual's income and expenditure.
See also paragraph 31.7.40
31.7.65 Early discharge income & expenditure review
For a full explanation of the early discharge provisions introduced by EA2002 and the effect this has when considering an IPA/IPO refer to paragraph 31.7.39.
If having been sent form IPOQ with form EDREV (requesting details of income and expenditure) the bankrupt completes and returns the form within the time allowed by the official receiver/trustee (see paragraph 31.7.39) and this reveals a change in circumstances whereby the bankrupt now appears to have surplus income from which to make a contribution, the official receiver/trustee should consider setting up an IPA in preference to applying for an IPO, prior to taking any further action regarding early discharge. If the bankrupt fails to co-operate in returning form IPOQ or fails to agree to an IPA it is unlikely that early discharge would be pursued where the bankrupt has failed to co-operate in this way. Without any other additional matters of non co-operation, failure to return the form will not be sufficient to justify application to suspend discharge.
If it has not been possible to agree an IPA, the official receiver when trustee or an insolvency practitioner appointed as trustee may consider applying for an IPO, but in order for the IPO to be valid the application must be instituted before the bankrupt receives his/her discharge from bankruptcy.
[Back to Part 6] [On to Part 8]
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