Understanding Income Payment Agreements
Following a bankruptcy petition, a trustee in bankruptcy must seek to maximise realisations for creditors. They will look at your surplus income in order to do this. When you are interviewed by the official receiver, they will ask you to complete an income and expenditure form, setting out your monthly spending. If surplus income is available, following the review, you will be required to make monthly payments for 36 months as a contribution to your bankruptcy estate.
How is an income payments agreement calculated?
When considering the monthly payments for an income payments agreement, the trustee in bankruptcy will look at what you have left each month, after what is considered essential expenditure. If you are solely on income from benefits, then you will not be required to pay. However, any salary or maintenance income will be considered. You will be required to pay in 100% of any surplus income each month, starting from a surplus of £20. If your surplus is less than £20, you will not be required to set up an income payments agreement. However, the trustee will look to reassess your financial position ahead of your discharge from bankruptcy.
Only spending considered as essential for day-to-day life will be considered allowable by the trustee. These spends will be capped in line with spending guidelines for your circumstances. For example, if you live alone but spend £400 per month on food, you would be expected to cut this down to around £200 per month, perhaps by changing to a budget supermarket. An income payments agreement will expect you to be more frugal with your budgeting, seeking to assist you with money management moving forwards.
Other allowable expenses include:
- Rent or mortgage payments;
- Council tax;
- Gas, electricity and water;
- Insurances required by law, or by your mortgage provider;
- Car tax, maintenance and breakdown cover, if you are permitted to retain your vehicle;
- Broadband and telephone, although mobile phone contracts must be reasonable;
- Healthcare costs such and prescriptions and dental;
- Maintenance payments;
- Spending on clothing and personal hygiene.
A number of expenses not considered allowable include:
- Private school fees;
- Pension contributions over and above the contracted amount;
- Alcohol, tobacco and gambling. (If required, help can be found through the NHS.);
- Satellite TV packages;
- Charitable donations;
- Gym or club memberships;
- Holiday funds.
These lists are not exhaustive. If your circumstances change, for the better or the worse, you must contact your trustee in bankruptcy immediately.
What if I don’t agree with the amount of the income payments agreement?
If you don’t agreement with the amounts requested by your trustee in bankruptcy, the last thing you should do is ignore the issue. This will, likely, result in the trustee seeking an income payments order through the court. You should contact the trustee and present the reasons you should be allowed additional expenditure to be taken into account, when calculating your income payments agreement. Accepted reasons for additional expenditure may include:
- Medical dietary requirements, ie Coeliac;
- Gym or club memberships for medical purposes;
- Private school fees to the end of the current year if your child is in GCSE year;
- Significant travel expenses for a higher paid job.
If you continue to engage with the trustee, the amount due under the income payments agreement can be negotiated. They can also allow a £10 per month contingency, per member of your household, to allow a little more breathing space.
What if you fail to cooperate with the trustee?
As previously mentioned, if you fail to respond to a request for an income payments agreement, the trustee will likely apply to the court for an income payments order. Under an income payments order application, a judge will be presented with your income and expenditure information. They will then assess the level of your payments.
If you are near the point when you have been bankrupt for a year, the trustee will also seek to have your discharge from bankruptcy suspended. This means that you will be subject to continuing restrictions of bankruptcy until you either enter the income payments agreement, or payments have been secured under the income payments order. You should bear in mind that when discharge is suspended, this opens a longer window in which assets such as a windfall or inheritance will be caught, which would otherwise be excluded from the bankruptcy.
Overall your best bet is to cooperate and negotiate with the trustee in bankruptcy when asked to make payments of an income payments agreement. You should also note that if you have significant assets, annulment may be more appropriate. If you seek to go down this route you must act quickly after the bankruptcy order has been made. Our business rescue experts can help you take decisive action to secure your financial position.