Income Payments Orders
May 2007
Introduction
i What is the purpose of an Income Payments Order?
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 unpaid. To address this point, section 310 of the Insolvency Act 1986 provides that the trustee can apply to the court for an order that the bankrupt (or his/her employer) make regular payments from his/her income into the estate from ‘surplus’ income. Such an order is known an Income Payments Order (or IPO).
The Enterprise Act 2002 (EA2002) extends this idea by introducing the Income Payments Agreement (IPA) to run alongside IPOs. IPAs are entered into voluntarily however, 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.
NB Where the bankrupt has income in excess of expenditure, an IPA should be obtained in preference to an IPO, which should only be sought in those cases where the bankrupt does not consent to the proposed IPA.
For further information see Case Help Manual part: Income Payments Agreements
ii How are such cases identified?
An application for an IPO will only be made by the official receiver as trustee i.e. after the no meeting notice has been issued or after a first meeting where no insolvency practitioner was appointed and where the case is deemed suitable for an IPA but the bankrupt refuses to consent.
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 PIQ and statement of affairs in debtors’ petition cases, 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 and supporting evidence provided such as payslips and utility bills. It may be that the information provided is sufficient for a decision to be made that there is no excess income and no further action is then required in respect of the bankrupt’s income.
For further detailed guidance on what the official receiver may or may not consider permissible when considering the bankrupt's income see Technical Manual Chapter 31 paragraphs 31.7.59 - 31.7.63
iii Amount for which an order can be sought.
April 2008
As with an IPA, an IPO 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 for which an order should be sought 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 IPO 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 . (See Household Expenditure Spreadsheet on Technical Section intranet site). Guidance as to what amount is appropriate can also be obtained by using the Income Payments Calculator available on the Technical Section intranet site, which 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 IPO.
Where the bankrupt is self-employed, a fixed monthly figure may not be appropriate for the IPO as income may be variable. The IPO will have to be tailored to meet the individual circumstances of the case and should be reviewed in a more active way than those from individuals in paid employment.
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 that should be sought. Guidance as to what amount is appropriate is contained in the IPO table. (T31/03 Annex 2). (See also Household Expenditure Spreadsheet to be found on Technical Section’s home page on the Intranet).
If 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 order. 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 IPO, so if the bankrupt is in receipt of benefits and has surplus income, an IPO contribution should only be sought to the extent of the non-benefit income.
An IPO 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.
If a bankrupt who is solely in receipt of benefits has surplus income and has agreed to contribute on a voluntary basis, no enforcement action can be taken if the bankrupt fails to make agreed voluntary payments, and voluntary payments cannot be enforced via an IPO.
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. The official receiver/trustee must maintain this approach when considering the expenditure claimed by the bankrupt, and must also ensure that the expenditure items allowed in any IPO calculation are sufficient to ensure the reasonable domestic needs of the bankrupt and his/her family are met within that expenditure.
The examples listed below represent a small sample of items which may be considered:
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 order contribution.
v Application.
November 2007
Application must be made to the court which is dealing with the bankruptcy to fix a date and time for the court to hear the application in Chambers. (See note a) below). This should be at least 6 weeks ahead as the bankrupt must have 28 days notice of the hearing. An IPO may be made on an application instituted (i.e. made) before the date of discharge.
The official receiver must then prepare a report on form IPORAC. The bankrupt is informed of the hearing date on form IPONA enclosing a copy of the report and application and informed that he/she has the opportunity at the court hearing to show why an order should not be made or why the terms of the order sought by the official receiver should be varied.
vii Staggered or stepped orders.
These orders require a bankrupt to begin making payments with immediate effect but they allow for the amount of the payment to increase after a certain period of time eg 3 months. This type of order could be made where the bankrupt is deemed to be making excessive mortgage payments, for instance, and/or where the payments are being made by the bankrupt on behalf of himself and one or more other parties who have separate incomes and could be expected to make some sort of contribution to the mortgage payments. If the court agrees, during the initial 3 month period, for example, the bankrupt would be expected to come to an arrangement with his mortgagee (bank or building society, etc.) to make lower mortgage payments or find alternative accommodation. Such an order should not be sought however if it is likely to lead to the bankrupt becoming homeless.
viii ”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), 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.
Once the NT tax code IPA/IPO is obtained the local tax office should be notified using form IRNTC (letter 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 Case Help Manual part : Tax Refunds
ix Cases to go to RTLUs.
Once the IPO 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.
Clarke Willmott, the collection agents should be instructed on form ICW by e-mail, as soon as possible after the IPO is obtained, The e-mail should be 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 IPO, 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.
If the bankrupt has made payments direct to the official receiver prior to the handing over of the case to the agents, this information should be detailed in the instruction sheet (form ICW) so that any such payments can be taken into account. Where the case is an NT tax coding IPO, or there is an NT tax code element in the IPO, the collection agents must be informed so that once the NT tax code has been applied they can start collecting the payments without delay.
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.
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 IPO pending the appointment of an insolvency practitioner, by instructing the collection agents in the usual way.
x What if the individual defaults in making payments?
As soon as the individual subject to an IPO 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 the 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 the an IPO 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 IPO 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 IPO as having lapsed and no further action will be taken.
Where a response is received from the individual, with supporting evidence, which indicates that a reduced IPO may be appropriate, the RTLU will prepare an application to court to vary the IPO to seek payment directly from an employer or third party and will liaise with the originating official receiver for a court date. The local official receiver will be requested to attend at court for this variation hearing but the RTLU will prepare and serve all necessary paperwork.
For more information on varying an IPO see paragraph xi varying, reviewing or discharging an IPO.
Where appropriate, the contractor will provide the RTLU with such information as is required in relation to any application to court following the initial IPO, but the drafting of the application itself will be the responsibility of the RTLU and not for the contractor to undertake.
The RTLU policy for dealing with defaulters should be followed by official receivers offices in cases which are retained in office during an investigation or for other reasons.
It should be noted that although there is still an option to suspend discharge, this should only be considered in the most extreme cases.
xi Varying, reviewing or discharging an IPO.
An IPO can only varied, reviewed or discharged by order of the court although either the official receiver as trustee or the bankrupt can apply to have the order varied or discharged. A formal application must be made to the court (form IPORAV) .The court can change the terms of the order (vary) or it can order that the order be discharged (ended). Any order made must then be served on the bankrupt and other interested party e.g. an employer.
If the bankrupt’s income was reduced making it impossible to maintain the payments then application could be made to the court to vary the amount to be paid or to discharge the order so that the bankrupt no longer has to make the payments.
Similarly, if the bankrupt’s income increases to such an extent that the trustee believes that he/she has more disposable income and is therefore able to pay more than the court ordered, application can be made to the court to review the order.
The varied order may state that the bankrupt’s employer should deduct the payments from the bankrupt’s salary and forward them directly to the trustee. The order also allows the employer to deduct an administration fee to cover his administration costs. Where a bankrupt is self-employed but there is one person for whom he/she normally works, application can be made for that person to make the deductions in the same way as an employer would. However, this approach should only be taken where the bankrupt cannot pay rather than will not pay as there is no desire to add to any tension between the bankrupt and his/her employer.
The court, if it thinks that "no sufficient cause is shown for the application", may dismiss the application.
If the court does not dismiss the application a date and time for the hearing will be fixed and the applicant must give the other party at least 28 days notice of the hearing. If the official receiver is the applicant, a copy of his/her report must be sent to the bankrupt together with notice of the hearing.
xii 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 IPO 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.
xiii 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/IPO – 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 and there is no change in circumstances, 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
xiv What has happened to IPOs in existence at 1 April 2004?
There are transitional provisions for IPOs which were in existence as at 1 April 2004, the date on which the provisions of EA2002 came into force.
Where an individual was made bankrupt but not discharged prior to 1 April 2004, he/she was a “pre-commencement bankrupt” and would have been discharged from bankruptcy either on 1 April 2005 or his/her due discharge date, whichever was the earlier.
Where an IPO was in force in respect of a pre-commencement bankrupt but the order did not specify the date at which it would have ceased to have effect, there is some confusion regarding the date at which the IPO should cease. Please note that payments should be sought until discharge.
In the case of a second time bankrupt due to be discharged on or before 1 April 2009, payments under an IPO would only be expected for 3 years if there is no date specified on the IPO.
Where there was an IPO which specified a date at which the IPO no longer had effect, it will remain in force until that specified date, regardless of whether the bankrupt has been discharged under the transitional provisions. The IPO will then lapse. However, the transitional provisions provide in such cases that a pre-commencement bankrupt may apply to the court to vary an IPO or to provide for the IPO to cease to have effect earlier than the date specified on the order.
For more information see Technical Manual 31.7.57.
Note
a) An application made “in Chambers” takes place in an office of the District Judge or High Court Registrar with less formality than an application heard in “open court.”
Where can I find out more?
Insolvency Act 1986
Section 310 and 310A.
Insolvency Rules 1986
Rule 6.189 - 6.193.
LOIS Workbooks IPAs and IPOs
Technical Section homepage
Household Expenditure Spreadsheet
Technical Manual:
Chapter 31.7 – Income Payments Agreements and Income Payments Orders
Case Help Manual:
Technical notices:
T31/03 – Income Payment Orders – A Consistent Policy
Forms to be used:
IPORAC – IPO, Report and Application to Court
IPOSV – Income Payments Order,Service on Bankrupt
IPOSV – Income Payments Order,Service on Bankrupt
IPONA – IPO,Notice of Application
IPO – Income Payments Order
IPORAV – IPO Variation Report and Application to Court
IRNTC – Letter re Nil Tax coding
TNIDIS – Tax and NI Disclosure Authority
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
Click HERE to view the Flowchart for IPO's
LOIS screen references are given in brackets e.g. (D073).
1 Receive instructions to arrange a hearing date for an IPO application.
2 Contact the court and fix a date and time for a hearing in Chambers. This should be at least 6 weeks ahead. Diarise the date and note LOIS accordingly (CA08).
3 Complete form IPORAC (IPO, Report and Application to Court)(DO73).Send 3 signed copies of the application (IPORAC) for sealing to the court, together with one copy of the report for the court file and request that they return 2 copies of the sealed application and retain a copy for filing on the court file. Enter date of application on LOIS(CA32).Ensure forms are returned from Court with sufficient time to give bankrupt at least 28 days notice of hearing date.
4 Complete form IPONA (IPO, Notice of Application)(DO73) and send to bankrupt together with a copy of the form IPORAC. Send a copy of the form IPONA to the court for filing on the court file. File copies of the IPORAC and IPONA on the office file.
5 Any telephone call or written communication from the bankrupt about the IPO application should be referred to the examiner.
Before the hearing date
6 Pass 3 copies of form IPO(4 copies of form IPO will be needed if the bankrupt’s employer will be making the payments direct) to the official receiver/assistant official receiver who is attending the hearing(D073) and request that 2(or 3) copies are returned and one retained for filing on the court file.
Once order made
7 Receive the sealed IPO from the officer who attended Court and prepare form IPOSV (Income Payments Order, Service on Bankrupt)(D073). Send one copy of form IPO under cover of the IPOSV to the bankrupt or employer, where appropriate. Place copy IPO and IPOSV on the office file.
8 Note details of order on LOIS (CA32).
9 If there are any other assets in the case that would justify an insolvency practitioner appointment make the necessary arrangements. Ensure that the bankrupt is contacted to arrange for the payments under the IPO to start prior to the insolvency practitioner’s appointment ,if there could be a time delay before he takes office.
For more information see Case Help Manual parts: Appointment by the Secretary of State and Handover to Insolvency Practitioner
10 If no appointment of an insolvency practitioner is to be made 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 as soon as possible after the IPO is obtained 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.
11 If the IPO is an NT tax coding IPO 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.
12 If the bankrupt has already made payments direct to the official receiver before the case has been passed to Clarke Willmott, the instruction sheet should be completed accordingly so that any such payments can be taken into account.
13 If notification is received from the RTLU that they are making an application to vary the IPO, they 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.
14 Inform the official receiver/ assistant official receiver of the date of the hearing so that arrangements can be made for attendance at court. Advise the RTLU of the outcome of the hearing.