Bankrupts to pay more under coalition government
As from 1 December thousands of consumers made bankrupt in the UK will have to pay more towards the cost of the administration of their affairs through Income Payment Agreements (IPAs).
Previously, bankrupts kept any disposable income (DI) up to £99, above which they would pay back a percentage, ranging from 50% to 70%.
For example, under the old policy an individual who was deemed to have £85 per month DI would keep all of this. If they had say £200 DI then around 50% to 70% would have been taken, this being £100-£140, leaving them with £100-£60 to keep. Under the new policy everything above £20 DI will now be taken.
What is an Income Payment Agreement (IPA)?
An IPA is a legally binding written agreement between the bankrupt and the Official Receiver (OR) that requires the bankrupt to make specified payments for a specified period, usually 36 months. If the individual refuses then the OR can apply to the court for an Income Payment Order (IPO).
How do you calculate disposable income (DI)?
The OR's staff will review the income and expenditure of the bankrupt, using industry set guidelines and if there is any money left over after paying normal living expenses then this is known as disposable income (DI).
For example, the individual takes home £2,000 per month after tax and their expenditure, agreed with the OR, is £1,800 - the difference is £200 which is the DI. Under the new policy the bankrupt will be left with £20 and £180 would go towards the IPA.
Why the change in policy now?
There are several theories doing the rounds, one is that the Insolvency Service is subject to cutbacks under the Spending Review and because the cost of administering a straightforward bankruptcy case is rising, with the average cost currently standing at £1,725. Increasing the income is seen as one way of balancing the books.
I'm not so sure though, I am hearing from my sources that the Insolvency Service is suffering a downturn in revenue from bankrupt's estates due to the falling valuations of bankrupt's home. Also they took on extra staff to deal with an expected surge in numbers going bankrupt and this has not materialised.
Another argument for a change in policy is that IPA payments should be in line with those in an Individual Voluntary Arrangement (IVA), (where you make monthly payments for five years and at the end of the arrangement any remaining debts are written off).
Currently in an IVA all the DI is taken after reviewing the expenditure in a similar way as in the bankruptcy. This new policy will at least make this comparable in payments even though the IVA runs for five years as against three years in a bankruptcy.
Not surprisingly the move will generate quite an additional income on top of any gains from selling the bankrupt's vehicle or home, as over the past four years there has been a total of 53,694 IPAs and 294 IPOs.
What about those going bankrupt before 1 December 2010?
There are now a lot of even more worried bankrupts out there and I don't blame them. I spoke with the Insolvency Service and they informed me that those bankrupts that currently have an IPA and have a change in circumstances, i.e. they have an increase in wages then they will be reassessed under the OLD policy and will not be subject of the new regime.
However, those that are bankrupt before the 1 December 2010 and have not been subject to an IPA and experience a change in circumstances that then produces a DI above £20 then they will be subject to the NEW regime where anything above £20 will be taken.
Is the government right to do this?
I believe they needed to level the playing field for bankruptcy and IVAs payments but I would have liked to have seen only 75% of DI taken in both scenarios.
This then gives the consumer an incentive to work, with any extra DI in their pocket going to help cover any ambiguities or unexpected expenditure and would also help prevent IVAs from failing through too little expenditure allowances, which is all too often the cause.
A favourite quote from the coalition government is "we are all in this together", and by the looks of things this includes bankrupts as well.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
An Initial Public Offering is the US equivalent of flotation, and is the first sale of equity in a private company in the form of shares (know as stocks in the US) to the public in order to raise capital to finance growth.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.