June 2006
NB In consent cases, an Income Payments Agreement (IPA) should be used in preference to an Income Payments Order (IPO). This includes cases where the bankruptcy order was made before 1 April 2004, as long as the IPA itself is dated after 1 April 2004.
Introduction
i What is the purpose of an Income Payments Agreement?
One of the aims of bankruptcy is that the creditors should receive part or full payment of what they are owed. Creditors often feel aggrieved when they believe that the bankrupt continues to enjoy a good lifestyle whilst the debts remain unsatisfied. To address this point, section 310 of the Insolvency Act 1986 provided that the trustee could apply to the court for an order that the bankrupt (or his/her employer) made regular payments from his/her income into the estate, from ‘surplus’ income. Such an order is known an Income payments Order (or IPO).
For more information see Case Help Manual part : Income Payments Orders
The Enterprise Act 2002 (EA2002) extended this idea by introducing the Income Payments Agreement (IPA) to run alongside IPOs. Although the system for IPAs is voluntary, there is a formal binding agreement between the official receiver and the bankrupt that the contributions will be made. In effect, the IPA works in the same way as an IPO but removes the need for the official receiver or trustee to make an application to court with the potential time delays that may lead to. It is envisaged that in the majority of cases where the bankrupt has income in excess of expenditure, an IPA will be obtained 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.
Section 310A of the Insolvency Act 1986 provides that the trustee or official receiver and the bankrupt can enter into a written agreement that the bankrupt, or a third party instead of the bankrupt, will make regular payments of a specified amount into the estate for a specified period. The IPA can only be entered into prior to the discharge of the bankrupt and, although it may continue after the bankrupt has been discharged from bankruptcy, it may not end after the period of three years beginning with the date on which the agreement became binding. The period for which the IPA is to run must be specified in the agreement document.
Unlike an IPO, the official receiver does not have to be trustee of the bankrupt’s estate to be party to an IPA. This means that an IPA can be agreed early in the proceedings.
ii How are such cases identified?
The bankrupt should in all cases answer the questions regarding income and outgoings which will appear in either the statement of affairs in debtor’s petition cases, or the B40.01 (PIQ B), preliminary information questionnaire (PIQ) in all other cases. Both the debtor’s statement of affairs and PIQ, ask for details of the bankrupt’s income and normal monthly expenses such as rent, food, heating and lighting, clothing etc. and should be completed before any interview with supporting evidence such as payslips and utility bills. Where the bankrupt subsequently attends for interview, the examiner may query any contentious points contained in this information with the bankrupt.
It may be that the information provided is sufficient for a decision to be made that there is no likelihood of an IPA and no further action needs to be taken in this regard. However, if it appears that the bankrupt has income in excess of what he/she requires to pay for the reasonable domestic needs of himself/herself and his/her family, an IPA should be considered.
iii Amount for which an agreement can be sought.
April 2008
An IPA should not be sought the effect of which would be to reduce the income of the bankrupt below the level considered adequate to meet the reasonable domestic needs of the bankrupt and his/her family.
There is no fixed amount and each case is decided on its own merits after the bankrupt has given details of his/her income and expenditure. Payments should normally be made monthly. The rate of payment under an IPA has been developed along similar lines to those used by the courts themselves in assessing rates for attachment of earnings orders and payment of judgment debts by instalments. The Income Payments Calculator incorporates the calculation rates , and can be used to provide a figure for the bankrupt’s monthly payment. This figure should then be discussed with the bankrupt and agreed to by him/her. Where possible, the bankrupt’s consent to the proposed figure should be obtained in writing.
Where the bankrupt is self-employed, a fixed monthly figure may not be appropriate for the IPA as income may be variable. The IPA will have to be tailored to meet the individual circumstances of the case and should be reviewed regularly to allow for fluctuations in income.
Generally, once the real disposable income has been assessed, that is the income remaining after all expenditure necessary to finance the reasonable domestic needs of the bankrupt and his/her family, 50-70% of this should be sought by way of monthly payments. Usually, the higher the real disposable income, the higher the percentage contribution that should be sought. Guidance as to what amount is appropriate is contained in the IPA table (T31/03 Annex 2). (See also Household Expenditure Spreadsheet to be found on Technical Section’s home page on the Intranet)
Where the bankrupt is in receipt of benefit and other income, and has surplus income above that required to meet his/her reasonable domestic needs, the official receiver should still consider the possibility of obtaining an income payments agreement. Any calculation to identify surplus income should include all available income, including state benefits, which includes child tax credit. The only exception to the inclusion of state benefits in an income payments calculation is where a bankrupt is in receipt of child benefit, which is not an income based benefit (unlike child tax credit).It is the income from the sources other than the benefit(s) which is providing the payments under an IPA, so if the bankrupt is in receipt of benefits and has surplus income, an IPA contribution should only be sought to the extent of the non-benefit income.
An IPA should not be sought where the bankrupt’s only source of income is state benefit payments. It is unlikely that where a bankrupt’s income solely comprises state benefits any surplus will arise, the exception to this is where the bankrupt is in receipt of non-means tested benefits, such as Disability Living Allowance.
In circumstances where the bankrupt’s income solely comprises state benefits but he/she has income surplus to that required to meet his/her reasonable domestic needs, a voluntary payment can be considered. Having established that there is a surplus of income taking in to account their reasonable domestic needs, if the bankrupt agrees to contribute on a voluntary basis, voluntary payments could be incorporated into an IPA. It should be clearly noted that no enforcement action would be taken if the bankrupt failed to make agreed voluntary payments.
iv What can be deemed as reasonable expenditure?
November 2007
A consistent approach should be taken to those items that may, or may not, be allowed when considering whether the bankrupt’s expenditure is reasonable. Items such as TV licence, household and car insurance and car road tax are examples of what may be treated as part of the bankrupt’s domestic needs. As far as mobile phones are concerned, costs must be reasonable and it may be necessary to disallow part of the costs if they are excessive or only for social use. If the calls are largely work related, a check should be made whether the employer is reimbursing the bankrupt for those calls.
Items such as gym membership, private healthcare insurance and additional pension contributions to enhance a pension should not be treated as allowable unless there are extenuating circumstances.
As far as holidays are concerned, it is accepted that a bankrupt is entitled to a break from routine and some allowance may be made for a modest holiday. If a bankrupt disputes the amount considered reasonable by the examiner, he/she should be advised that any additional holiday cost will have to be funded from any surplus income left with the bankrupt after deduction of the income payments agreement contribution.
An allowance for clothing may be included in the calculation. What is considered reasonable expenditure may depend on (for example) whether the bankrupt is required to purchase specific clothes for their employment. If the amount claimed appears excessive (with reference to the guidance figures provided relevant to their family circumstances in the Household Expenditure Spreadsheet), the bankrupt should be asked to provide an explanation and evidence as to why they require the extra allowance. After school clubs can be allowed if they are used to provide childcare whilst the parents are working but if used simply for convenience, it is up to the bankrupt to fund it. In the same way, it would seem reasonable to allow one extra-curricular class per child but any additional classes should be funded from any surplus income. Technical Manual Chapter 31.7 Part 2 provides specific guidance regarding reasonable and allowable expenditure. As with all expenditure, any amounts in excess of the guidelines provided may be funded from surplus income left with the bankrupt after deduction of the income payments agreement contribution.
v The agreement
Once the bankrupt has consented to the proposed monthly payment, it is for the official receiver to provide a draft agreement for consideration using form IPA. The agreement must specify how long the IPA will run for (not more than 3 years from the date of the agreement) and the amount to be paid each month or agreed period if the bankrupt is self-employed, for example and has an income that fluctuates.
Once the IPA has been drafted by the official receiver, it can be presented at interview for the bankrupt to sign or may be sent to the bankrupt for signature under cover of form IPALET requesting that it be returned within 14 days. If the official receiver deems it appropriate, a longer period than 14 days may be specified. This could be true over holiday times or the Christmas period, for example. If the bankrupt decides not to sign the IPA, he/she must notify the official receiver of that decision within the same timescale as specified by the official receiver for return of the signed form.
The Service has decided to provide a "cooling off" period for the bankrupt regarding the IPA. If the agreement was signed at interview, the official receiver should take no further action for 14 days. If after 14 days, the bankrupt has not contacted the official receiver to withdraw consent to the agreement, it should be signed and dated by him/her and this is the date that the IPA becomes effective. Where the IPA is sent to the bankrupt by post, the 14-day period will run from the deemed date of receipt by the bankrupt, which is to be 2 days after the date of dispatch by the official receiver and not from the date on which the bankrupt signed the agreement. This means for example, that if the IPA is sent to the bankrupt for signature on 1 September, the 14-day period will run from 3rd – 17th September. If the official receiver receives the agreement signed by the bankrupt before that date, he/she only has to wait until 17 September to sign.
A copy of the IPA signed and dated by the official receiver must then be sent to the bankrupt with form IPAPAY which also explains how the bankrupt may make the contribution. Where the IPA directs a third party, such as an employer, to deduct the monthly payments at source, a copy of the agreement must also be sent to the third party.
Where the bankrupt does not consent to the amount sought under an IPA, the official receiver should consider whether to make application to the court for an IPO. However, please note that an IPA can only be entered into prior to the discharge of the bankruptcy and therefore the bankrupt must agree to and the official receiver must accept the IPA prior to discharge. Where the bankrupt does not consent to the IPA or there is insufficient time to obtain an IPA prior to discharge the official receiver has the option of applying for an IPO, since an IPO may be made on an application instituted before the date of discharge.
vi ”NT” tax code Income Payments Agreements and Income Payment Orders
When a bankruptcy order is made against an individual who is subject to PAYE, HM Revenue and Customs (HMRC) applies a “nil tax” code to that person for the remainder of the tax year in which they were declared bankrupt and can then claim in the bankruptcy for the amount of tax which would have been collected (plus any other money owed for previous years), as long as the debtor does not change his/her source of income (i.e. gets a new job) during the tax year in which the bankruptcy order was made.
Where the new tax code is expected to be applied before the end of the tax year an IPA/IPO should be obtained. Where the bankrupt has signed the form TNIDIS (Tax and NI Disclosure Authority), an Income Payments Agreement (IPA) should be sought in preference to an Income Payments Order (IPO), to claim the extra money that the debtor receives.
An IPA/IPO can be made purely on NT tax code grounds and is not dependent on whether the debtor has any disposable income to make regular payments. However, the ability of the bankrupt to be able to afford his/her reasonable domestic needs and those of his/her family still must be considered for NT only IPAs/IPOs. On rare occasions an IPA/IPO may not be sought to recover the funds resulting from the application of an NT code.
Once the NT tax code IPA/IPO is obtained the local tax office should be notified using form IRNTC (letter to re nil tax coding) enclosing a copy of the form TNIDIS. This letter asks HMRC to forward notice of tax coding to the official receiver’s agents, Clarke Willmott. They will then deal with collecting the amounts payable.
For further information see Technical Manual Chapter 31.7, T6/05 and Case Help Manual part: Tax Refunds.
vii Cases to go to RTLUs
Once the IPA is effective, and if there are no other assets in the case that would justify the appointment of a trustee, it will be for the appropriate RTLU to administer payment collection and monitoring. In those cases where there are sufficient other assets to warrant the appointment of a trustee, the official receiver should not neglect to take steps necessary to secure the payments under the IPA pending the appointment of an insolvency practitioner.
Clarke Willmott, the collection agents, should be instructed by e-mail using form ICW addressed to bbreports@clarkewillmott.com and a copy of the instruction should be forwarded to the RTLU with the rest of the case papers. There is no need to copy the IPA, bankruptcy order or estate ledger print-out to the collection agents. Clarke Willmott will acknowledge receipt of the instruction with their reference number to the originating official receiver.
Where the bankrupt has already started making payments to the official receiver direct, this information should be detailed in the instruction sheet (ICW) so that these payments can be taken into account.
If the case is an NT tax coding IPA or there is an element of NT tax coding Clarke Willmott must be informed using form ICW, so that once the NT tax code has been applied the collection of payments can start as soon as possible.
Clarke Willmott will issue temporary payment slips to the bankrupt until a payment book has been received. The letter issued with the temporary payment slips does advise that the payment book may take up to 6 weeks to arrive and asks bankrupts to contact Clarke Willmott if they need any more temporary payment slips.
For further information see Case Help Manual part : Book Debts.
viii What if the individual defaults in making payments?
As soon as the individual subject to an IPA misses a payment, the contractor will issue a first reminder letter. If the bankrupt still fails to make payment at the next due date, Clarke Willmott will issue a second reminder letter. If the bankrupt still fails to make payment after the second reminder letter, Clarke Willmott will inform the relevant official receiver/ RTLU.
Where the bankrupt has received a bonus payment from his/her employer and has contacted Clarke Willmott, Clarke Willmott will inform the bankrupt that the official receiver's office will get in touch with them. Clarke Willmott will then inform the relevant official receiver/ RTLU regarding the bankrupt’s receipt of bonus and it is then for the official receiver/ RTLU to follow the matter up.
If an individual contacts the contractor to make him aware that there are temporary financial difficulties which in the opinion of the contractor will be overcome within a short period, the contractor will have the discretion to agree the terms under which any missed payments are made good and to ensure that the schedule of payments is brought up to date without the need to refer the matter back to the RTLU.
Where the situation cannot be resolved by the agent in this way or if the problem is more permanent, the situation will be referred to the RTLU. If the RTLU is satisfied that an IPA is no longer appropriate, because of the loss of a job or substantial reduction in income, the RTLU will inform the individual that payments will be suspended until the situation improves, with a reminder that the individual must notify the RTLU if things improve before the term of the IPA expires. Once the individual is in a position to make payments again, they will continue from that point and no attempt will be made to collect the missed payments. If no further payments are made, the RTLU will treat the IPA as having lapsed and no further action will be taken.
Where a reasonable response is received from the individual with supporting evidence, which indicates that a reduced sum payable under the IPA may be appropriate, the agreement can be amended by mutual consent and reduced payments will be accepted by the RTLU. If there is no response or the explanation provided is inadequate, the RTLU will prepare an application to court to vary the IPA to seek payment directly from an employer or third party and will liaise with the official receiver for a court date. The local official receiver will be asked to attend at court for this variation hearing but the RTLU will prepare and serve all necessary paperwork.
For more information see paragraph x varying, reviewing or discharging an IPA.
The RTLU policy for dealing with defaulters should be followed by official receiver’s offices in cases which are retained in office during an investigation or for other reasons.
ix Can the bankrupt’s discharge still be suspended?
There is no reason why the official receiver may not apply to the court for an order suspending the bankrupt’s discharge if he defaults such an application could encourage the bankrupt to get the IPA back on track. However, as a bankrupt will be discharged generally within 12 months of the date of the bankruptcy order, this may not be a particularly effective way of seeking compliance. A better route may be to seek a variation of the agreement to allow for the payments to be made via a third party such as an employer.
x Varying, reviewing or discharging an IPA.
An IPA can be varied by written agreement between the parties. However, in the event that one party seeks a variation to which the other does not consent, for example, to enable the collection of arrears of payments where the individual subject to the IPA has defaulted from the agreement without cause, an application can be made to court for the agreement to be varied. Such an application may be made by the individual subject to the IPA, the official receiver or trustee. The court may order a variation of the IPA (form IPAVO). The application to vary must be accompanied by a copy of the original agreement and the applicant must send a copy of the application and notice of the venue to the other party to the agreement at least 28 days before the date fixed for the hearing (for the official receiver this is form IPANVA). If the court orders that the IPA is varied so that a third party such as an employer is to make payments under the IPA to the official receiver or trustee, notice of the amended agreement must then be sent to that third party. An application to vary an IPA may be made after discharge although the earlier the application is made, the better chance of recovering the arrears.
xi Income review in early discharge cases
In those cases where the order was made on or after 1 April 2004, section 256 of EA2002 allows the official receiver to reduce the 12 month period of the bankruptcy further by filing a notice (EDNOT) stating that an investigation of the conduct and affairs of the bankrupt is unnecessary or concluded. This process will only be relevant to those cases marked NFI (early discharge) which have met the criteria set out below.
Once the official receiver has issued the report to creditors (form CAR A), he/she must allow a 3-month period for any responses from creditors to the report. In those cases where there is no IPA or IPO, and the official receiver is trustee, the official receiver should carry out an income review by sending to the bankrupt a form EDREV enclosing an income and expenditure questionnaire (form IPOQ), which is required to be completed and returned within 14 days. The official receiver can choose to bypass the checking of a bankrupt’s income if it is thought unlikely that the position would have changed since they were first assessed for an IPA – if, for example, their only source of income at the date of the bankruptcy order was a state pension. The reason for the bypass should be recorded on LOIS (CA25). If the bankrupt fails to return the form within 21 days or his/her explanation for submission after 21 days is not accepted when the completed form is finally received, the early discharge process should not be pursued and the bankrupt will have to wait for the full 12-month period before obtaining discharge.
After the submission of the IPOQ within 21 days or acceptance of submission after 21 days, the official receiver should issue a formal letter (form EDNCR) notifying the creditors that he/she intends to file the early discharge notice at court (form EDNOT) with the result that the bankrupt will be discharged on the date that the court seals the notice. Unless the creditors respond to the letter with full details within 35 days, the official receiver may file the notice.
If an insolvency practitioner has been appointed as trustee, he/she should be telephoned by the case officer in advance of sending out the EDNCR to find out whether there are any problems with the case, which might lead the official receiver to the conclusion that early discharge should not be considered. A formal note of the telephone conversation should be kept using form EDTIP. If there are no matters arising, the file note need only record that fact and the name of the person spoken to in the insolvency practitioner's office. Any matters brought to the attention of the case officer during the telephone call should be drawn to the attention of his/her line manager for discussion with an assistant official receiver, who will arrange for matters to be followed up with the insolvency practitioner in writing.
For further information see Case Help Manual part: Discharge from Bankruptcy.
Where can I find out more?
Insolvency Act 1986
Sections 310 and 310A.
Insolvency Rules 1986
Rules 6.189 - 6.190, Rules 6.193A – C
Household Expenditure Spreadsheet – Technical Section homepage
Technical Manual :
Chapter 31.7 – Income Payments Agreements and Income Payments Orders
Case Help Manual :
Technical Notices:
T6/05 –NT Tax Code Income Payments Orders and Agreements
OROS Bulletin 2 of 2005 – issued June 2005(revised) – paragraph 12 – IPAs and IPOs
OROS Bulletin 3 of 2005 - issued November 2005 - paragraph 9 - review meeting with Clarke Willmott
OROS Bulletin 1 of 2006 -issued February 2006 - paragraph 14 - review meeting with Clarke Willmott
Forms to be used:
IPA – Pro forma agreement and variation agreement
IPALET- Letter to bankrupt enclosing IPA/reminder letter
IPAPAY -Letter to bankrupt enclosing signed effective IPA with agent’s details
IPANVA -Notice to bankrupt of application for variation
IPAVO - IPA variation order
IRNTC – Letter to Inland Revenue re Nil Tax coding
EDNOT – Notice of Early Discharge
EDREV- Early Discharge – Income & Expenditure review
EDNCR – Notice of Intent to File Early Discharge Notice/Release
EDTIP - Record of telephone conversation with insolvency practitioner - early discharge
IPOQ – income and expenditure questionnaire
ICW – Instructions to Clarke Willmott
TNIDIS – Tax and NI Disclosure Authority
Click HERE to view the Flowchart for IPA's
LOIS references are given in brackets, e.g. (DO73)
1 Instructions given that case has been identified as being suitable for an Income Payments Agreement (IPA) (CA08).
2 An IPA form will have been prepared for consideration by the bankrupt(DO73). The form will specify how long the IPA will run for (not more than 3 years from the date of the agreement) and the amount to be paid each month. If the bankrupt is self-employed or has an income that fluctuates, e.g. landscape gardener, the agreed amounts together with the relevant period which they are to cover will be included in the form.
3 Where agreement is obtained at interview in the office, the bankrupt should sign form IPA and be given a copy to take away with him/her. Form IPALET should also be handed to the bankrupt explaining that there is a 14 day 'cooling off period' during which time he/she can contact the official receiver if he/she changes his/her mind. Note LOIS accordingly (CA78).
4 If within the cooling off period the bankrupt contacts the official receiver to withdraw his/her consent, the matter must be referred immediately to the examiner/AOR. Where possible the examiner will re-negotiate the amount concerned and send any re-drafted agreement to the bankrupt for signature and return within 14 days. If consent cannot be obtained, the case should be re-considered for a possible IPO.
5 At the end of the 14-day period where the signed IPA has been received from the bankrupt, the official receiver will sign the agreement. This becomes the effective date of the IPA. A copy of the IPA signed and dated by the official receiver must then be sent to the bankrupt with form IPAPAY which explains how the bankrupt may make the contributions. Where the IPA directs a third party, such as an employer, to deduct the monthly payments at source, a copy of the agreement must also be sent to the third party. Note LOIS accordingly (CA78/CA15).
6 Where the bankrupt is interviewed by telephone, the IPA form will be posted to the bankrupt under cover of form IPALET. N.B. Where the form is sent to the bankrupt by post, the 14-day period will run from the deemed date of receipt by the bankrupt, which is to be 2 days after the date of dispatch by the official receiver and not from the date on which the bankrupt signed the agreement. This means for example, that if the IPA is sent to the bankrupt for signature on 1 June, the 14-day period will run from 3rd – 17th June. If the official receiver receives the agreement signed by the bankrupt before that date, he/she still has to wait until 17 June to sign. Once the 'cooling off period' has expired a copy of the IPA signed and dated by the official receiver must be sent to the bankrupt with form IPAPAY explaining how the bankrupt may make the contributions. If the IPA directs a third party, such as an employer, to deduct the monthly payments at source, a copy of the agreement must also be sent to the third party.
7 At the end of the 14 days, where the official receiver has not been contacted by the bankrupt to withdraw his consent, the official receiver should sign and date the agreement. The signing of the document by the official receiver causes the agreement to become legally binding. Note LOIS accordingly (CA78/CA15).
8 Once the IPA is effective, and if there are no other assets in the case that would justify the appointment of a trustee, the case must be transferred to the appropriate RTLU to monitor collection(CA41). Clarke Willmott, the collection agents, should be instructed by the originating official receiver’s office via e-mail addressed to bbreports@clarke.willmott.com and a copy of the instruction forwarded to the RTLU with the rest of the case papers. Clarke Willmott will acknowledge receipt of the instruction with their reference number to the originating official receiver.
9 If the IPA is an NT tax coding IPA or contains an NT tax coding element issue form IRNTC to the bankrupt’s tax office. Clarke Willmott must also be informed on the instruction sheet ICW, so that once the NT tax coding has been applied they can start collecting the payments without delay.
10 If the bankrupt has already made payments direct to the official receiver before the case has been passed to Clarke Willmott, the instruction sheet ICW should be completed accordingly so that any such payments can be taken into account.