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bankruptcyhelp.org.uk Forum - IPAs ASSESSMENT OF REAL DIPOSABLE INCOME-PART 2
IPAs ASSESSMENT OF REAL DIPOSABLE INCOME-PART 2 New Topic Reply to Topic
Posted - 23 March 2007 : 17:18:33
Part 2 - IPAs ASSESSMENT OF REAL DISPOSABLE INCOME
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
Income arising from nil tax (NT) coding - see paragraph 31.7.15
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
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.
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.
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.
Edited by - Debtdummy on 23 March 2007 17:29:48