Insolvency Made Clear: A Guide for Debtors

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Effect Of Bankruptcy although it is in the interest of both the Trustee and the bankrupt for the bankrupt to continue to trade. An application for an IPO can only be made before the bankruptcy is discharged. An IPO can last up to three years from when it is made (s310(6)). ‘Reasonable domestic needs’ will depend on the circumstances of each individual. It has been held that private school fees were a reasonable domestic need, where removal from school would be detrimental to the children. In general, the Trustee (and the court) will be more favourable to the needs of the bankrupt’s family than the bankrupt themselves. The bankrupt should estimate what their typical monthly expenditure is. If the bankrupt routinely earns enough to have savings for the future, the bankrupt should anticipate losing these savings in an IPO. This is an area where the Trustee has a large amount of discretion, and so a good working relationship is likely to lead to a more favourable outcome for the bankrupt. If the bankrupt and their family are renting property, an often contentious topic is whether they should be forced to move to cheaper accommodation. The Trustee should consider the impact on the bankrupt’s family, for example, whether the home has special features to accommodate a disability. The Insolvency Service has published guidance which can be found at https:// www.insolvencydirect.bis.gov.uk/technicalmanual/Ch25-36/Chapter31/part7/ Introduction.htm. It says its Official Receivers will seek to use the Office for National Statistics data on the national average outgoings. However, there is no fixed rule. The OR will not seek to collect surplus income if the surplus is too small, e.g. less than £20 per month. In general, the bankrupt will not be allowed luxuries at the expense of the creditors. For example, the Insolvency Service guide says at paragraph 31.7.113 that “No allowance should be included for social and entertainment expenses (e.g. cigarettes, alcohol, betting etc.)” and at paragraph 31.7.114 “In normal circumstances membership of a sporting club, gym, golf club, stables etc. is not considered an essential day-to-day living requirement”. At paragraph 31.7.116, the guide says there should be an allowance of only £10 a month for the bankrupt and for each dependant household member for ‘sundries and emergencies’. The guidance was published in 2010. A bankrupt could reasonably ask for more today. An IPO can also be an order that a bankrupt’s employer or other source of income makes a payment directly to the Trustee instead of to the bankrupt (s310(3)(b)). The usual practice is for the order to be that the bankrupt makes payments to the Trustee rather than make any order to a third party. However, if the bankrupt does not meet the payments in the order themselves, the Trustee can apply to vary the IPO for the sum to be paid by a third party. 31
Insolvency Law Made Clear – A Guide For Debtors In order to avoid an IPO, the Trustee is likely to offer an income payments agreement (IPA) under s310A of the Act. The Trustee can send a draft to the bankrupt, who will have 14 days to decide whether to approve it or state the reasons why they do not approve: typically because it does not allow expenditure on an item the bankrupt considers reasonable. This is a binding agreement, but it does not require court approval. It typically takes the form where the bankrupt agrees to pay the Trustee £x a month for Y months. The IPA is likely to have provision for variation, in case the bankrupt gets a promotion or loses their job. An IPA is likely to lead to a better outcome for both the Trustee and the bankrupt. The Trustee will avoid the additional expense of going to court, and is likely to make a more generous offer in order to do so. As a policy, the OR allows a 14 day ‘cooling off ’ period following an IPA to give the bankrupt time to reflect on whether they are happy with the agreement. An IPA, once it has been agreed, can be enforced as if it was a court order (s310A(2)). Both IPAs and IPOs can only last for three years beginning with the date of the order or the agreement. It is common to last the full three years. There is therefore an advantage to the bankrupt of agreeing the IPA as quickly as possible. The sooner it is agreed, the sooner it will be over. The court is not sympathetic to Trustees who apply for IPOs in order to recover funds for the creditors when the sum of money requested is disproportionate to the cost of the application itself. Given that a contested application will cost (say) £4,000 at 2021 rates and an IPO will last at most 36 months, the court will be unimpressed if the difference between the Trustee’s demand and the bankrupt’s offer is less than £100 per month. This factor is a useful point for negotiation: provided the bankrupt makes a reasonable offer, even if it is at the lower end of reasonable offers, the Trustee will feel pressure to accept it rather than make a costly application for an order. See Chapter 18 on settlement for further information. In practice, the Trustee will give the bankrupt an allowance which they consider reasonable. The Trustee is likely to have a conversation with the bankrupt about what the bankrupt needs to spend money on, for example on fuel for the car, or clothing for children. The bankrupt may need to rely on social security for housing support or to supplement their income. This book does not describe the process for relying on support from the local authority or Universal Credit: see https://www.gov.uk/browse/benefits for more information. The aim of a Trustee in Bankruptcy is not to let the bankrupt starve, but the Trustee will expect outgoings to be at a minimum to collect the extra money to distribute to the creditors. If the bankrupt suffers a loss in income or enjoys an increase, both an IPO and an IPA can be varied to change the amount to be paid. An IPA can be varied 32
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Published June 2021 ISBN 978-1-9163
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Acknowledgments I owe special thank
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Insolvency Law Made Clear - A Guide
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Insolvency Law Made Clear - A Guide
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