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 Income Payments Agreements, Income Payments Orders
 Income Payments Orders
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Junior Member

United Kingdom
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Posted - 23 March 2007 :  17:37:44  Show Profile  Reply with Quote


December 2006

31.7.53 Introduction to the IPO

Provision is made by section 310 of the Act [note1] for the trustee to apply to the court for an order requiring the bankrupt or a third party instead of the bankrupt to make regular payments from the bankrupt's income into the estate. The application to court must be instituted prior to the bankrupt's discharge. The term of the IPO must be specified in the application and incorporated into the order, and can extend beyond the date of discharge.

It is envisaged that in cases where the bankrupt has surplus income available to make a repayment to his/her bankruptcy estate creditors, an Income Payments Agreement (IPA) should always be sought in preference to an IPO, which should only be sought in those cases where the bankrupt fails to consent to the proposed IPA or does not co-operate with the official receiver. Refer to Section 1 of this chapter for information regarding Income Payments Agreements.

31.7.54 Income

Section 310(7) [note 2] widely defines the income of the bankrupt for income payment order purposes as:-

"..every payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled, including any payment in respect of the carrying on of any business or in respect of any office or employment..".

Despite the provisions of the Welfare Reform and Pensions Act 1999, payments received by the bankrupt under a pension scheme whilst he/she remains undischarged from bankruptcy, should be included in any IPO calculation (see Chapter 61, Pension Schemes, paragraph 61.10).

The exceptions to this are:

a) payments by way of guaranteed minimum pension, that is any pension provided by an occupational pension scheme in accordance with the requirements of the Pension Schemes Act 1993 [note 3]; and

b) payments giving effect to the bankrupt’s protected rights as a member of a pension scheme.

For more information regarding occupational pension schemes, guaranteed minimum pensions and protected rights see Chapter 61, Pension Schemes, paragraphs 61.3 and 61.26–31.

31.7.55 Reasonable domestic needs

In assessing the amount the bankrupt is able to pay under an income payments order, the official receiver as trustee must make allowance for the "reasonable domestic needs" of the bankrupt and his/her family. [note 4]

The bankrupt’s family are persons who are living with him/her and who are dependent on him/her. [note 5]

The assessment of "reasonable domestic needs" will be based on an examination of all the circumstances of the individual case. For example it is possible that a bankrupt who has a low income may still be capable of contributing to an IPO if his/her living costs are low because he/she lives with relatives at an advantageous rate or pays a low rent. However, it should be noted that the court will not make an order the effect of which would be to reduce the bankrupt’s remaining income below the amount needed to meet his/her "reasonable domestic needs".

The official receiver or trustee must ensure that an agreement with the bankrupt to make regular repayment from his/her income is only entered in to where the bankrupt can afford to do so. In the case of Boyden v Watson [2004] BPIR 1131, Manchester County Court, District Judge E R Jones 27 January 2004] [Note 6] the trustee made application to the court for an IPO following a failed attempt by the trustee to set up a voluntary payments agreement with the bankrupt (this was prior to the enactment of the EA2002 IPA provisions). The court stated that the only issues which required consideration were the amount the bankrupt could afford to pay and for what period. The trustee's application was dismissed because the court held (having tested the bankrupt's explanation as to the reasonableness of his monthly expenditure) that it was not possible to make an IPO as this would have the effect of reducing the income of the bankrupt to below the amount necessary to meet his reasonable domestic needs, and that to make a nominal order for the period of three years would be of no benefit to the creditors. The court commented further that the trustee's application was misleading in that, rather than seeking to obtain an IPO in order to fulfil his duty to realize and distribute the bankrupt's estate, the trustee was primarily motivated in making the application by a wish to guarantee payment of his fees.

The official receiver must undertake an objective assessment of the information supplied by the bankrupt relating to income and expenditure, must not attempt to prejudge what the court might regard as being reasonable in the particular circumstances of the case and must act fairly in putting the relevant facts before the court. In the case of Rayatt, (Re: Rayatt (A Bankrupt) [1998] BPIR 495) for example, [note 7] the court held that school fees could be treated as a reasonable domestic need for income payments order purposes as to remove the bankrupt’s eldest child from the fee paying school she attended just before taking GCSE’s would unfairly prejudice her education.

In the case of Scott (Re: Scott (A Bankrupt) [2003] All ER D 214), [note 8] who appealed against a decision to make an IPO against him, the court stated that it is for the bankrupt to produce sufficient evidence to the court for a decision to be made on the matter of school fees as a "reasonable domestic need." The fact that this bankrupt was unhappy with local state schools, opting instead for private education, was not deemed sufficient in itself to make the school fees acceptable as a reasonable domestic need.

A detailed examination as to what may be considered permissible when deciding what constitutes reasonable expenditure is contained in Part 2 of this chapter. A useful source of information showing average monthly expenditure for a variety of domestic groups is produced annually by the Office for National Statistics (website link available on Technical Section intranet site). The Family Expenditure Survey on the Technical Section intranet site provides information taken from this website in the format of a table which allows easy comparison with the information as provided in the debtor's Statement of Affairs, or in the case of a creditor's petition, the Preliminary Information Questionnaire (PIQB).

31.7.56 The period of the order
The order must be made prior to the bankrupt's discharge but with the reduction in the discharge period introduced by EA 2002, the IPO will generally continue beyond the date of discharge up to a maximum of 3 years from the date on which the IPO was made. [note 9]

The term of the IPO must be specified in the application and incorporated into the order.

31.7. 57 IPOs in force as at 1 April 2004

As a result of the enactment on 1 April 2004 of the EA 2002, where an individual was already bankrupt at 1 April 2004, and the automatic discharge provisions applied and had not been suspended, he/she was eligible for discharge either on his/her due discharge date, or 1 April 2005, whichever date was the earlier. Where the bankrupt was already subject to an IPO at 1 April 2004 and was eligible for an earlier discharge under the transitional arrangements he/she may have considered that his/her obligation to pay under the IPO ceased when he/she received their discharge from bankruptcy under the transitional provisions. (See Chapter 22, Discharge, Annex 1 for more information on the transitional discharge arrangements). This is not necessarily the case, as the IPO may have referred to a specific date when payments should cease and not to the date of discharge. This means that the bankrupt will still be bound by the terms of the order until the cessation date recorded in the order, which can be later than the date of discharge introduced by the EA2002 transitional provisions. Once the date (as specified in the original IPO) at which payments cease is reached, the IPO will then lapse. The transitional provisions also provide for the individual (who was subject to an IPO at 1 April 2004 where a cessation date was specified), to apply to court to vary the order or apply for the IPO to cease to have effect earlier than the date specified on the order.

If within the IPO a general reference is made to "date of discharge" rather than a specific date on which the IPO will cease, the matter is more complicated. Legal advice received by The Service suggests that the official receiver should consider applying to the court in cases where no specific cessation of payment date was recorded in the IPO. The court should be asked to provide clarification as to the perceived cessation date that was originally intended when the IPO was made and to vary the order as appropriate to ensure that payments continue as originally envisaged (up to the date on which the bankrupt would have obtained his/her discharge under pre EA2002 legislation as originally ordered). Where the automatic discharge provisions applied and were not suspended, the bankrupt's pre EA2002 discharge date would not have exceeded three years from the date of the original order, therefore any order varied in this way should not be in breach of the three year maximum IPO term allowed under either pre or post EA2002 legislation.

31.7.58 Second or subsequent bankruptcy against individual subject to IPO at 1 April 2004

In the case of a second time bankrupt who is eligible for discharge on or before 1 April 2009, where no date was specified on the order, it would be inequitable to expect him/her to pay for longer than the usual 3 year period following the commencement of the order.
Where a subsequent bankruptcy order is made, any undistributed funds form part of the assets in the subsequent bankruptcy and this includes money received under an IPO. The court may give directions modifying the order for the benefit of the second set of creditors, which modifications may include lengthening the period of the IPO up to a maximum of 3 years from the date on which the IPO was made. [note 10] Following completion of the original order (including any extension directed by the court) arising from the previous bankruptcy, the official receiver/trustee may need to consider whether he/she should apply for a subsequent IPO in the later bankruptcy proceedings if the bankrupt remains in a position where he/she has surplus income from which to make a contribution, remembering that an IPO application must be initiated before discharge.

[Back to Part 5] [ On to Part 7]

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