Expenditure to be considered in an income payments calculation

December 2010 

Part 4  Expenditure to be considered in an income payments calculation  

31.7.80 Assessing expenditure against reasonable domestic needs (amended April 2012)

When making an assessment of the outgoings claimed as essential by the bankrupt, the official receiver should always consider each case on its own merits. An assessment should be made as to whether the outgoings are realistic, relevant and appropriate to the bankrupt’s circumstances and whether outgoings included are sufficient to provide for the reasonable domestic needs of the bankrupt and his/her family. The Household Expenditure Spreadsheet (HES) is available on the intranet for comparison, this provides average expenditure statistics available for various household groups, based on the most recent Office of National Statistics figures. Further guidance issued by ORBS is available at Annex D.

Any expenditure included in the bankrupt’s statement which appears to be non-essential or included simply to prevent any surplus becoming available should be closely questioned,  e.g. weekly launderette costs are included but the bankrupt has use of a washing machine at home.  Particular care should be taken where the bankrupt has been assisted in preparing his/her statement by a commercial organisation, as a set of pro-forma outgoings may have been included which are not expenses actually incurred by the bankrupt on a day-to-day basis, see also paragraph 31.7.26.



31.7.81 Assessing whether expenditure is reasonable or excessive

The bankrupt may argue that the continued payment of certain expenditure items is required, above that considered reasonable by the official receiver to meet the reasonable domestic needs of the bankrupt and his/her family.  If the bankrupt persists in his/her argument, the official receiver should ask for further information detailing the extenuating circumstances justifying why he/she considers this an essential expenditure.  Guidance to assist with assessing whether expenditure claimed meets a reasonable domestic need is provided at the following sections.  It should be noted this is not an exhaustive list, and all expenditure claimed must be considered in the context of the individual’s personal and family circumstances:

Section

Expenditure type

Paragraphs

(a)

Accommodation costs

31.7.82 to 31.7.91

(b)

Communications

31.7.92 to 31.7.93

(c)

Education (including student loans)

31.7.94 to 31.7.106

(d)

Employment, self-employment, tax and pensions

31.7.107 to 31.7.109

(e)

Entertainment, sports, leisure and social

31.7.110 to 31.7.115

(f)

Family and household

31.7.116 to 31.7.118

(g)

Family maintenance payments

31.7.119 to 31.7.120

(h)

Healthcare

31.7.121 to 31.7.123

(i)

Motoring and travel costs

31.7.124 to 31.7.125

 

 

Section (a) Accommodation costs

31.7.82 Rent arrears

(August 2011)

In the case of  Christina Sharples v Places For People Homes Limited [2011] EWCA Civ 813 the Court of Appeal held that the right of a landlord to recover his/her property from a defaulting tenant is not affected by bankruptcy.

The case concerned the situation where a possession order had been obtained against a tenant, holding an assured tenancy in respect of rent arrears. The tenant had been declared bankrupt five days before the possession hearing. The Court of Appeal upheld an earlier decision [note 1] that the possession order was not a remedy against the property or person of the bankrupt and therefore was not restricted. [note 2]. The Court of Appeal made it clear that the landlord might seek possession of the property both before or after the date of the bankruptcy order, permission of the (bankruptcy) court was not required to continue the possession proceedings [note 3].

The landlord is not entitled to recover any arrears of rent, except by way of dividend in the bankruptcy. A possession order granted might still be suspended but not on condition of the payment of rent arrears. Any suspended possession order in force at the date of the bankruptcy order might be varied to remove any provision for payment of rent arrears.

The consequence of this is, in assessing a bankrupt for an income payments agreement, or order, official receivers should not include any amounts payable in respect of rent arrears under a suspended possession order. Commencement of the agreement should be deferred or stepped allowing the bankrupt time to seek a variation of the suspended possession order. Under no circumstances should the bankrupt be advised to cease making payments under the terms of the suspended possession order before it has been varied by the court.

No allowance should be made in respect of an informal agreement to make payments of  rent arrears to avoid possession proceedings. Such payments should stop immediately, even if this might trigger an application for possession.

31.7.83 Mortgage payment “holidays”

Where a bankrupt is subject to an IPA/IPO and the official receiver becomes aware that he/she has requested or received a payment “holiday” with regard to the repayments they are making to their mortgage provider, a full explanation should be obtained from the bankrupt as to why he/she has requested a payment holiday.  He/she should be asked to complete a new IPOQ,  including any increased income as a result of a reduction in payment to the mortgage provider,  and also taking into account any additional expenses which may have arisen since the original assessment. Where, having assessed the new information provided,  the mortgage payment “holiday” results in an increase in the surplus available, the IPA/O can then be varied to increase the monthly payments for the duration of the payment “holiday” as the bankrupt’s outgoings will have decreased. It is likely that the documentation provided to the bankrupt by the mortgage company will include an acknowledgement of the debt, giving the mortgage company the right to pursue the individual post bankruptcy for any shortfall arising on the sale of the property. Any increased IPA/IPO payment should be agreed before the official receiver provides his/her consent (if required) to any payment “holiday”.

31.7.84 Assessing mortgage payments

Mortgage re-payments may be extremely high where the bankrupt is in arrears with payments or has taken on a mortgage to the maximum extent of their income.  Where the bankrupt is making the entire mortgage payment against a property which is jointly mortgaged, and no (or minimal) contributions are being made by third parties, the official receiver should take this into account when assessing the bankrupt’s capacity to make payments under an IPA/IPO.

A bankrupt who is making mortgage repayments is ensuring a home for him/herself and his/her family, but is also repaying a bankruptcy debt. Where the bankrupt continues to make high mortgage repayments this is likely to be at the expense of his/her unsecured creditors, and the official receiver should consider whether he/she should seek to disallow a fair share of the payments being made in respect of any joint liability.  The official receiver should also investigate with the bankrupt the possibility of extending the repayment terms of the mortgage, thus reducing the amount to be paid on a monthly basis and increasing the amount of income available to be included in an IPA or IPO. Factors which should be considered include the possibility that renegotiating the terms of a mortgage (including payment holidays) and/or lengthening the mortgage period may give the lender an opportunity to make the bankrupt liable for any mortgage shortfall post bankruptcy.

The judgment in Malcolm v Official Receiver [1999] B.P.I.R. 97 [note 4] considers the possibility of obtaining an IPO against a bankrupt who may not have an obvious surplus of income over expenditure because the mortgage payments made by the bankrupt are excessive and/or the payments are being made by the bankrupt on behalf of himself/herself and one or more other persons with separate income(s),  who might be expected to make some contribution towards the mortgage payment. Further information on the Malcolm case can be found at paragraph 31.7.86).

31.7.85 Pursuing IPAs/IPOs where mortgage payments appear excessive

Whilst the official receiver would not wish to make a bankrupt homeless through the pursuit of an IPA/IPO, he/she should continue to pursue an agreement to make income payments contributions,  where the bankrupt has sufficient surplus income taking in to account his/her reasonable domestic needs and where mortgage payments appear excessive. Care should be taken when assessing outgoings to identify any liability for mortgage obligations in addition to the family home, e.g. if the bankrupt’s income is being used to supplement mortgage payments for properties owned with or by other family members such as partners, spouses, parents, in-laws or children.  The official receiver should consider whether the subsidising of such payments gives the bankrupt an equitable interest in the relevant property.  Usually such payments should be disallowed when considering the bankrupt’s expenditure and the mortgagee should be left to consider its position having regard to its security.

Where mortgage payments are considered excessive this may involve the official receiver in pursuing an income payments order, by seeking to disallow excessive mortgage payments, as in the case of Malcolm v Official Receiver [1999] BPIR 97 (see paragraph 31.7.86).

 

31.7.86 Malcolm v Official Receiver [1999] B.P.I.R. 97 – requirement to seek alternative rented accommodation

The case in April 1998 of Malcolm v Official Receiver [1999] B.P.I.R. 97 (Judge Mr Justice Rattee) [note 4] is the long-standing authority for the proposition that the official receiver may explore proposals to reduce payments by way of mortgage instalments, which may involve finding alternative accommodation, so that a bankrupt would be able to make significant payments for the benefit of his/her creditors. In this case the official receiver applied for an IPO, demonstrating in his application to the court that Mr Malcolm had sufficient surplus income after a reduction in his (excessive) mortgage outgoings,  to make payments of £105 per month.  At the initial hearing it was accepted that the bankrupt was unable to pay this amount until he found alternative accommodation, so the Judge made an interim order for payments of £50 per month for a period of three months and ordered that the matter was to be reviewed before the court at the end of this period.

As the bankrupt had not found alternative accommodation so was not in a position to pay even the £50, Judge Rattee upheld an appeal against this order from Mr Malcolm,  but only on the specific understanding that the matter  was to be brought back before the court, and that at the later hearing, the bankrupt would have to provide carefully worked out proposals to reduce the mortgage instalment payments,  which would involve finding alternative accommodation.

Where suitable (not necessarily equivalent) rented accommodation is available to the bankrupt in the same or similar area (having regard for the family’s domestic needs and circumstances), and is significantly cheaper than the cost of the mortgage payments claimed by the bankrupt, a view will need to be taken by the official receiver as to whether an amount equivalent to the rented accommodation is allowed rather than the total mortgage repayment amount claimed by the bankrupt.

31.7.87 Consideration of regional cost variations and rental deposits

Regional variations in the costs and availability of rented accommodation will need to be considered by the official receiver when calculating the reasonable domestic requirements of the bankrupt.  As a result of the requirement to pay a deposit when entering a rental contract, it may be necessary to delay the commencement of an income payments agreement to enable the bankrupt to accumulate the necessary funds to make the deposit payment , this action in the long term being beneficial to the estate by increasing the funds available to be paid later under the IPA/IPO. However, any delay in commencement of the IPA/IPO must take in to account that an IPA has to be signed by the bankrupt and the official receiver or trustee prior to the date of discharge.

31.7.88 Other considerations relating to the removal of the bankrupt and his/her family to alternative accommodation

In considering whether alternative rented accommodation is suitable for the reasonable domestic needs of the bankrupt and his/her family, the stage a child has reached in his/her education (for example where he/she needs to remain at the same school to complete a significant exam year) or the care needs of a dependant (e.g. day care or respite care) will need to be considered by the official receiver.  These matters should be taken into account when making any decisions regarding the flexibility of the bankrupt and his/her family in moving to alternative rented accommodation. It may also be necessary to delay collections under an IPA or agree a payment holiday (for example for 3 to 6 months) to allow the bankrupt to find alternative accommodation.  

Official receivers should check with their local council for guidance as to the accommodation allowances considered when calculating eligibility for council accommodation or in relation to  privately rented accommodation,  using the Local Housing Allowance (LHA) to work out Housing Benefit entitlement. LHA is used to work out the Housing Benefit entitlement of tenants renting private sector accommodation in England and Wales and the guidelines used by the council relevant to the area in which the bankrupt lives may be of assistance to official receivers in calculating what the minimum accommodation requirements might be for a bankrupt and his/her family within a similar area to their current accommodation.

Access to the direct.gov website containing details of the LHA and contact details for various local  council websites can be found at: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/BenefitsTaxCreditsAndOtherSupport/On_a_low_income/DG_10018928

There is also guidance available as to the criteria used by councils and housing associations when assessing eligibility for council house accommodation at: http://www.direct.gov.uk/en/HomeAndCommunity/Councilandhousingassociationhomes/Councilhousing/Applying/DG_188706

Further information on the LHA and eligibility criteria can be found at:
https://lha-direct.voa.gov.uk/Secure/Default.htmx

31.7.89 Payments to additional secured creditors

(Amended April 2011)

Where there are additional secondary secured creditors the official receiver should take into account all payments to be made.  Where there is no equity available to secondary charge holders, the official receiver should not include any payment to these creditors in an income payments calculation as there is no enforcement action that can be taken in respect of these debts as the asset is already fully charged, and as, in effect, the secondary charge holder is an unsecured creditor, any payment to it could be considered to contravene the provisions of section 285(3) of the Insolvency Act 1986.

31.7.90 Applying to court for an IPO where bankrupt disputes mortgage payment is excessive  

If the official receiver’s income payments calculation,  taking into account reasonable domestic expenditure but disallowing part of the mortgage repayments, suggests that the bankrupt has sufficient surplus to collect payments under an IPA but the bankrupt wishes to continue making excessive payments and/or payments on behalf of third parties without receiving any contribution from them, the official receiver may consider applying for an IPO rather than an IPA, following the judgment in Albert v Albert (A Bankrupt) (1996) BPIR 232 [note 5].   The official receiver must report the full facts to the court to allow the court to decide whether the bankrupt's claim that the expenditure is reasonable should be allowed.

31.7.91 Bankrupt to be encouraged to attend IPO hearing where mortgage payment disputed

Wherever possible the official receiver should encourage the bankrupt to attend the IPO application hearing, particularly where the effect of such an order might mean that the bankrupt can no longer meet the mortgage commitment, which may lead to the sale of the property. The bankrupt's attendance will allow the court to hear his/her views and possible proposals for dealing with the situation, which may include a voluntary sale of the property

Section (b) Communications

31.7.92 Mobile telephone costs

Costs must be reasonable when compared with average expenditure for telephone costs as detailed in the HES. It may be necessary to disallow part of the monthly amount claimed if the claim is above average and use of the mobile telephone can be shown to be predominantly for social purposes only. Where the bankrupt uses the mobile phone for business calls, the official receiver should establish whether the bankrupt's employer provides re-imbursement for this usage (or if self-employed, whether the bankrupt claims expenses for this usage from the business in addition to any other drawings/income they have already declared).  The re-imbursement can be included as additional income to off-set against the total expenditure claimed, or the work-related portion of the claim for mobile phone usage could simply be disallowed.  The same principle could also be applied where a bankrupt uses their landline home telephone for business as well as personal calls.

Where the bankrupt claims that use of a mobile phone is essential, but costs claimed have been reduced or disallowed by the official receiver/trustee in the IPA/IPO calculation, it is up to the bankrupt to consider whether a cheaper alternative is available, such as a "pay as you go" scheme. Where the bankrupt is still in receipt of ongoing services under a contract at the date of the bankruptcy order, the official receiver/trustee should take care not to adopt any ongoing service contract previously held by the bankrupt. Where a penalty is incurred arising from early termination of a telephone contract this should be included as a debt in the bankruptcy proceedings (see also paragraph 31.7.93)

31.7.93 Broadband and combined communication contracts

As more and more services and information become accessible only via the internet, a consumer panel report published in June 2009 [note 6] suggests that  For those households who have it, broadband has become an essential utility as important as electricity, gas or voice telephony”.  This view was further reinforced in March 2010 in the Prime Minister’s statement “Building Britain’s Digital Future”.  Broadband internet provision is often required to complete banking, job application forms, children’s homework etc. and also to access government or local council information and services, discounted goods and services, as well as general communication by e-mail etc.  The official receiver should consider this when assessing the reasonable domestic needs of the bankrupt and his/her family and the inclusion of the costs of a broadband service in an income payments calculation.

With the advent of combined TV, telephone and internet packages available via broadband (where telephone services are provided free or at a reduced rate as a result of the provision of a broadband or TV service), the official receiver should consider whether the expenditure claimed for these combined services may in fact be equal to or less than the cost of a traditional land line only telephone service, which would be considered a reasonable domestic need.

Ongoing contracts for the supply of goods and services which remain in force at the date of bankruptcy vest in the trustee of the bankruptcy estate and the official receiver should take care not to adopt any ongoing service contracts. Where the bankrupt has signed up to an entertainment/communication agreement or package for a set period which cannot be terminated without a penalty being incurred, any penalty for early cancellation should be included as a debt in the bankruptcy proceedings.

Section (c) Education

31.7.94 School trips and extra-curricular activities

Claims for extra-curricular activities should be assessed in the context of the individual’s circumstances and the needs of his/her dependant child/children.  Any excessive claims for multiple extra-curricular activities should be closely examined and evidenced. 

31.7.95 After school clubs

An expenditure claim for after school clubs should be considered where they are used to provide childcare where parents are working. If the use of the club is simply a matter of convenience for the bankrupt and/or his/her spouse/civil partner/partner the bankrupt should be informed that the cost of funding the club cannot be considered as an essential expense. 

31.7.96 Claims for adult children within the family unit who are students

Outgoings claimed in relation to a member of the family (aged 18 or over) who is in full time education will need to be considered in the context of the  reasonable domestic needs of the bankrupt and his/her family, which in some circumstances may also include an adult student. As with all expenditure,  the official receiver will need to consider each individual request on its own merits.  See paragraphs 31.7.97 to 31.7.101 for further information and possible variations according to the individual circumstances of the adult child and their potential domestic requirements.

31.7.97 Student resides full time at home, no income

Where the student continues to live at home full time whilst attending college or university (and is not in any paid employment),  enquiries should be made as to whether they make any contribution to the household expenses.  If not, reasonable domestic needs of the student living in the bankrupt’s household should be included as part of the allowable household expenses

 

31.7.98 Student resides full time at home, in paid employment

Where the student continues to live at home full time whilst attending college or university, but is also in some sort of paid employment, it is reasonable to expect they should be making some contribution from this income to their own living costs within the household. Any contribution from their earnings should be included as income within the IPA calculation, to be offset against their living costs as in the same way as income contributions from any adult living with the bankrupt would be included.

 

31.7.99 Student resides part time at home during holidays

Where the student lives away from home to study but returns home for holidays, an allowance might be made within the household outgoings for their holiday time occupation of the home (to accommodate the need for the student to be able to return home during holidays), although if the student is in any paid employment during this time at home, he/she should be expected to make a contribution to the household income as at 31.7.98

 

31.7.100 Student resides away from home permanently

Where the student lives away to study either permanently or during term time and has no other form of income, the official receiver may consider it is  meeting a reasonable domestic need of the family (in line with IA86 section 310(2)) for the parent to make a contribution towards the basic rental costs of living accommodation whilst the student is away from home.  Matters to be considered when assessing whether the expense claimed is reasonable include, for example, where the contribution assists the student in meeting the tenancy terms of a shared house, or the arrangement to pay a contribution towards the student’s accommodation has already been established prior to the bankruptcy order against the parent.

 

31.7.101 Non-specific payments to student children

The individual circumstances of each case should be taken into consideration, but the official receiver should not generally agree to allow non-specific  payments or allowances to adult children who are students.  The student can look to the student loan provisions, grants and/or part-time employment to assist with financing their education and domestic needs.   Should the bankrupt continue to dispute an IPA where the official receiver has disallowed a payment claim for a child who is an adult student and no agreement can be reached, the official receiver may decide to apply to the court for an IPO and allow the court to decide.

 

31.7.102 Student Loans

When considering the income and expenditure of a bankrupt who, at the date of bankruptcy is still liable to repay a student loan, the official receiver/trustee will need to establish whether the outstanding student loan debt is provable in bankruptcy and whether during the period of the IPA/IPO, the loan, or any part of it, will become repayable if it is not a provable debt in the bankruptcy. The status of the loan i.e. whether it is provable or non-provable (depending on the date the bankruptcy order was made) will remain the same, irrespective of whether the loan continues to be administered by the original loan company, or has subsequently  been “bought out “ by a different loan management company. Chapter 40 paragraph 40.24 explains fully the differences between student loans which are provable and those which are not, but in summary the situation with regard to student loans and whether they are provable debts is outlined in paragraphs 31.7.103 to 31.7.106.

 

31.7.103 Student loans – bankruptcy order made on or after 1 September 2004

In all bankruptcy cases where the order was made on or after 1 September 2004, all outstanding student loans are not provable debts and are not released on a bankrupt's discharge from bankruptcy.

 

31.7.104 Student loans – bankruptcy order made on or after 1 July 2004 (loans made under the Education (Student Loans) Act 1990)

Where the order was made on or after 1 July 2004, all student loans made under the Education (Student Loans) Act 1990 (often referred to as mortgage style loans) were also made non-provable in bankruptcy with the consequence that they were also not released on discharge. Where the bankrupt's student loan liability falls in to the category of a non-provable debt and the bankrupt is required to make repayment against that debt during the period of an IPA/IPO, this is an expenditure which needs to be included in any IPA/IPO calculation (however see also deductions for loan repayments under the Teaching and Higher Education Act 1988 below).

 

31.7.105 Student loans – bankruptcy order made prior to 1 July 2004

Where bankruptcy occurred before the dates listed at paragraphs 31.7.103 and 31.7.104,  student loans may be treated as provable debts in the bankruptcy and are released on discharge. 

 

31.7.106 Loans made under the Teaching and Higher Education Act 1988 

In the case of loans made under the Teaching and Higher Education Act 1988 (often referred to as income contingent loans), repayments are likely to be made through the operation of the PAYE scheme. Where an employer is served with an IPA/IPO and the employee is liable to have student loan deductions taken at source from his/her earnings, the employer should continue to make the student loan deductions for the period during which the IPA/IPO applies. As the IPA/ IPO assessment is made on the basis of take home pay, and the student loan repayment under the Teaching and Higher Education Act 1988 will have already been deducted at source, in this instance student loan repayments should not be included as an expenditure in the IPA/IPO calculation.

Section (d) Employment, self employment, tax and pensions

31.7.107 Allowances for professional affiliations or work related clothing or equipment

Certain professions require affiliation to or membership of a particular society or professional body before a person is allowed to work in that profession. In considering this in relation to the outgoings to be included in an income and expenditure statement, the official receiver should take into account whether the bankrupt can continue to work without payment for membership of a professional body.  With regard to clothing or specific equipment required as a necessity to carry out a trade or profession enquiries should be made as to whether the bankrupt receives an allowance for this or whether the clothing is provided and/or paid for by his/her employer, and the necessary adjustments made to reflect this in the bankrupt’s income and expenditure statement.

31.7.108 Tax where self-employed

Where the bankrupt is self-employed at the date of bankruptcy,  HMRC will regard that self-employment as ceasing on the date of the bankruptcy order and will submit a claim for outstanding tax to the date of the bankruptcy order. A self-employed individual who enters bankruptcy still has their tax allowances and is liable to pay tax on their self-employed earnings where he/she re-commences self-employment following the bankruptcy, irrespective of the fact that this may include part of the tax year in which he/she is declared bankrupt. 

31.7.109 Contributions to a pension or SAYE scheme

The official receiver should examine closely any deductions at source from earnings and consider whether payments or over payments into a pension scheme should be disallowed, as this is not an essential outgoing required to meet the reasonable needs of the bankrupt. In most cases an individual can elect to stop or reduce their contributions to a personal pension for a period of time.  Whilst the bankrupt may argue this will have the effect of reducing future income, the official receiver should explain that  the cost of maintaining his/her future income should not be made at the expense of his/her creditors. In the same way where the employer operates a SAYE saving scheme (where a proportion of the bankrupt’s income is deducted at source to purchase shares in the employing company), this expenditure should be investigated and disallowed, to ensure that the full amount of income available is included in an income payments calculation.

Section (e) Entertainment, sports, leisure and social

31.7.110 Television licence, digital and satellite entertainment (amended April 2012)

A television licence is considered part of normal family expenditure that should be taken into account when assessing a bankrupt’s income and expenditure, in line with the averages provided by the household expenditure survey (also see Annex D). Where the provision of digital, satellite or cable TV services is recorded as essential expenditure by the bankrupt,  the official receiver will need to assess whether the amount of expenditure claimed is required to meet the reasonable domestic needs of the bankrupt and his/her family in accessing television and communication channels. See also paragraph 31.7.93 regarding combined cable or satellite telephone, broadband internet and TV packages and paragraph 31.7.111 regarding the provision of TV services.

31.7.111 Matters to be considered regarding TV provision

Some suggested areas of enquiry to take into consideration when assessing the reasonableness or otherwise of the bankrupt’s claim for paid television and digital services are as follows:

  • Does the bankrupt live in an area where TV analogue signals have already been switched off or will be switched off in the near future? On present information the aim is to complete analogue switch off across the whole of the UK by 2012.
  • If the bankrupt does not have access to analogue broadcasts, does he/she have access to free digital TV via his/her TV set/equipment (e.g. Freeview or Freesat), providing free access to the standard UK TV channels?
  • Where no free option is available, is the amount that is being claimed for a satellite or cable system for a basic package providing access to the standard UK TV channels, or for an enhanced package of entertainment, including the full range of sports and entertainment channels and facilities? Whilst the former can be included as a reasonable domestic need where no free options are available, the latter would usually be considered as beyond that reasonably required to meet the bankrupt’s reasonable domestic needs.  The bankrupt should be advised that subscription to enhanced television services/entertainment packages must not be made at the expense of their creditors, and only the expenses of a basic cable or satellite service may be included as outgoings.  Where the bankrupt is in receipt of other services in a combined package, reference should also be made to paragraph 31.7.93 regarding combined cable or satellite telephone, broadband internet and TV packages, and a decision taken as to the reasonableness of the overall cost of any combined package.

31.7.112 Excessive or extravagant outgoings

Any outgoings which appear to be extravagant, excessive or unnecessary should be closely examined and discounted where the expenditure is not required to meet the reasonable domestic needs of the bankrupt and his/her family.  Where the bankrupt disputes that the expenditure is required, the official receiver should refer to the average expenditure information provided in the HES, and should take into account any evidence provided by the bankrupt, with reference to the individual’s circumstances, see paragraph 31.7.18 for information on case law concerning the need to consider individual circumstances (Re Rayatt [1998] B.P.I.R. 495) [note 7] and (Scott v Davis [2003] B.P.I.R. 1009) [note 8]. Some examples of outgoings which may require careful examination are included at paragraphs 31.7.113 to 31.7.115 but this is not an exhaustive list.

31.7.113 Social and entertainment expenses (amended April 2012)

No allowance should be included for social and entertainment expenses (e.g. cigarettes, alcohol, betting etc.) these should not be funded at the expense of creditors. Only in exceptional circumstances should the official receiver/trustee allow any flexibility concerning these expenses (see Annex D). 

31.7.114 Sports memberships and activities (amended April 2012)

In normal circumstances membership of a sporting club, gym, golf club, stables etc. is not considered an essential day-to-day living requirement.  Where sufficient evidence is provided to suggest that the expenditure is necessary, the official receiver should make a decision based on the circumstances relevant to the individual.  An example of individual circumstances affecting this type of expenditure might be where the bankrupt has evidence from his/her GP prescribing exercise as an essential health treatment, which may in turn require the bankrupt to pay for membership of a local gym to fulfil this treatment (see Annex D).

 

31.7.115 Payments to charitable and religious organizations

Where it has been the practice of a bankrupt to make a regular monthly payment from his/her income (sometimes referred to as tithing) to a charity or a religious organization/place of worship, this expenditure should not be funded at the expense of creditors so should not be included as an expense in the IPA/IPO calculation. Any surplus income available to the bankrupt must be subject to an IPA/IPO.

Section (f) Family and household

31.7.116 Assessing claims for family outgoings such as clothing, laundry, pets, hairdressing, holidays, sundries and emergencies etc. (amended April 2012)

Claims for the essential replacement and laundry of clothing (which may in some circumstances include dry-cleaning) should normally be included as a reasonable domestic need in any income payments calculation. What is considered reasonable will depend on the individual circumstances of the bankrupt and his/her family. Where a bankrupt records higher than average outgoings for clothing or laundry, when compared with the HES, he/she should be asked to provide further explanation/evidence as to why the higher amount is required.  In deciding whether an amount above the average should be allowed to enable the bankrupt and his/her family to meet their reasonable domestic needs, the official receiver should consider whether the bankrupt’s household includes, for example, young children or a family member with a diagnosed medical condition, who require frequent changes of clothing or bedding etc.  Other factors to consider are the nature of the bankrupt's employment and clothing requirements arising e.g. whether he/she is required by his/her employer to fund specific clothing relevant to his/her employment (see also paragraph 31.7.107).  

Other general household expenditure such as hairdressing, family holidays and additional allowances for pet expenses: food, insurance etc. should be considered on an individual basis.  No amounts should be included for these types of expenditure where it cannot be evidenced that the expenditure is fulfilling a reasonable domestic need given the particular circumstances of the bankrupt and his/her family. Where any household/family expenditure claimed appears above average or excessive, further explanation and evidence should be sought.    Where no evidence is provided to the official receiver to justify the excess expenditure, he/she should either disallow the expenditure or, where appropriate, include a reduced amount for that item, referring to the average expenditure guidance for a similar sized family unit in the HES, also see Annex D.

An allowance for sundries and emergencies of £10 per month for the bankrupt and £10 per month for each dependant household member may be included as an expense in all income and expenditure assessments commenced after 1 December 2010 for a new IPA/IPO.  So for example, an assessment for a bankrupt living with a partner and 2 children in the same household could include an amount of £40 per month for sundries and emergencies.

 

31.7.117 Household insurance

Any claims for items such as household insurance should be assessed by the examiner to consider whether the continued payment of the expense is an essential outgoing and what will be the consequence if the payment is disallowed. In normal circumstances payments for a standard building and contents insurance policy should be allowed as part of the normal monthly outgoings required to meet the bankrupt’s reasonable domestic needs, unless the amounts appear excessive in which case further enquiries should be made and/or the bankrupt prompted to make enquiries regarding a cheaper policy.

 

31.7.118 Life assurance expenditure

Where the bankrupt has listed payments for a life insurance/assurance policy this is likely to constitute an asset of the estate which can be realised on behalf of creditors.  The exact nature of the policy should be established and any policy documentation examined to establish whether there has been any assignment of the policy and whether there is a realisable asset available for creditors.  If a bankrupt continues to make payments in respect of a policy  taken out before the bankruptcy order, of which the bankrupt is the beneficiary, the whole benefit will be claimable by the trustee when it is paid out. The official receiver should inform the bankrupt of the consequences of continuing to pay premiums into a policy which vests in the trustee.  There is comprehensive information regarding the procedure to follow when dealing with life assurance policies in Chapter 31.5 Part 4 and Chapter 33 Part 3 and Case Help Manual Life Policies.

 

Section (g)  Family maintenance payments 

31.7.119 Bankrupt’s obligation to pay under a CSA assessment or family proceedings order

An obligation arising under an order made in family proceedings or under a maintenance assessment made by the Child Support Agency (CSA) under the Child Support Act 1991 is not a debt provable in bankruptcy [note 9]. It is a continuing obligation, payable out of income. Where a bankrupt has surplus income,  when making an IPA/IPO assessment the official receiver or trustee must consider the provisions of IA86 section 310(2) [note 10],  which expressly prohibits a court from making an IPA/IPO which would have the effect of reducing the bankrupt’s income below that which appears to the court to be necessary for meeting the reasonable domestic needs of the bankrupt and his/her family. The term "family" is restrictively defined for this purpose in section 385(1) of the Insolvency Act 1986 as meaning the persons (if any) who are living with the bankrupt and are dependent on him (or her). See paragraph 31.7.120 where the bankrupt is required to make maintenance payments to a spouse living separately from the bankrupt.

31.7.120 Spouse/civil partner in receipt of maintenance order, living separately from bankrupt

(Amended May 2012)

It may be that in practice, a spouse/civil partner/partner or former spouse/civil partner/partner is in receipt of a maintenance order, but is not living with the bankrupt, and an assessment may have been made under the Child Support Act in respect of a child or children not living with the bankrupt. In these circumstances the obligations of the bankrupt arising from any such order or assessment would not have to be included as a reasonable domestic need of the bankrupt’s "family" to comply with the provisions of section 310(2) because the term "family" is defined under the Insolvency Act 1986 [note 11] as encompassing only dependants living with the bankrupt.

It has been the case however, that when assessing the bankrupt's ability to pay under an IPO, the court has previously held that such obligations are reasonable demands upon a bankrupt’s income and has taken full account of the obligations arising from a maintenance order or a Child Support Agency (CSA) assessment such that it would not make an order for an amount which would limit a bankrupt’s ability to meet those obligations.  See also Re X (A Bankrupt) [1996] B.P.I.R. 494 [note 12] and Albert v Albert (A Bankrupt) [1996] B.P.I.R. 232 [note 5].

For this reason the amount payable by a bankrupt under a maintenance order or CSA assessment should be taken into account when calculating the amount which a bankrupt is able to pay under an IPA or IPO, but should be identified as a separate item.

Information concerning the CSA and a calculator for estimating the amount of maintenance the bankrupt will be likely to pay, depending on the number of children, where he/she is the non-resident parent, can be found at http://www.csa.gov.uk/

Section (h) Healthcare

31.7.121 Prescription charges

Where the bankrupt is liable to pay for prescriptions and is claiming for multiple item monthly prescription charges, the official receiver/trustee should assess whether the costs claimed are in excess of the average monthly prescription costs available under either a three month or twelve month pre-payment certificate. These prepayment certificates can provide a considerable reduction in the monthly cost of prescriptions where an individual has to pay for more than four prescription items in three months or fourteen items in twelve months.

For the most up-to-date information on prescription costs and pre-payment certificates see the NHSBSA website at: http://www.nhsbsa.nhs.uk/1127.htmx

www.dh.gov.uk/.../en

 

31.7.122 Health care provision, including dentists and opticians

NHS healthcare is provided to meet the reasonable needs of the population in providing healthcare, so as an essential expense whilst for example, payment towards NHS dental care should be included, claims for expenditure for private treatment or health insurance would not normally be considered. Where the bankrupt can demonstrate to the satisfaction of the official receiver/trustee that he/she has no practical alternative but to pay for private healthcare (such as there being no NHS dental service available to them in the area where they live or work) an allowance for payment for an annual check-up and basic treatment at a privately run dental practice may be considered as meeting a reasonable domestic need, in the same way as an allowance for charges made by an NHS dentist for these treatments should be allowed.  

In the same way the costs of paying for eye tests,  glasses etc. may be included as a reasonable outgoing.  The official receiver should investigate above average claims, and, where a cheaper alternative is available (e.g. less expensive glasses frames) which would still meet the bankrupt’s reasonable needs, only allow expenditure sufficient to provide the cheaper alternative.

It must be stressed that any payments claimed for private healthcare or medical insurance should only be allowed where it can be demonstrated that there is no practical alternative NHS facility available, or, for example, that to disallow the payment would have a significant detrimental effect on the health, wellbeing or future of a dependant child.

 

31.7.123 Healthcare entitlements in the UK for non-UK citizens

Anyone deemed to be ordinarily resident in the UK, or who is working for an employer based in the UK (including ship workers whose vessel is registered in the UK and off-shore workers working in a UK sector), or who is a self-employed person whose principal place of business is the UK,  should be entitled to free NHS hospital treatment in England.

This means a bankrupt who comes from a European Economic Area (EEA) country member state and declares themselves bankrupt whilst ordinarily resident and working in the UK,  and who meets the designated criteria,  should be entitled to free NHS hospital treatment, as will their family. 

He/she will still be liable to pay statutory NHS charges (for example prescription charges) unless otherwise exempted (e.g. due to a particular medical condition). Non EEA citizens working for an employer based in the UK or self-employed mainly in the UK may be required to provide additional proof of employment, (such as a valid work permit), in order to meet the criteria required to receive free NHS hospital treatment.   Also some EEA citizens may be required to provide additional information depending on their particular country of origin (see information on NHS website below). Anyone who is not ordinarily resident in the UK is subject to the National Health Service (Charges to Overseas Visitors) Regulations 1989 (as amended) which makes the NHS hospital responsible for deciding whether an individual meets the necessary criteria to receive free hospital treatment.

Any claim for private healthcare costs by a bankrupt whose country of origin is outside the UK should be investigated and evidence provided as to why the bankrupt is unable to receive free hospital treatment. Any unnecessary expenditure should be disallowed as detailed at paragraph 31.7.122.

For more information go to the NHS website at:

http://www.dh.gov.uk/en/Healthcare/Entitlementsandcharges/OverseasVisitors/Browsable/DH_074373

 

Section(i) Motoring and travel costs

31.7.124 Costs of maintaining a vehicle retained by the bankrupt

Where the bankrupt retains a vehicle which is necessary for his/her employment, business or vocation[note 13], the official receiver will need to allow sufficient expenditure to maintain and power the vehicle. This means that reasonable outgoings for petrol, car or bike insurance, road tax and annual MOT should be considered as part of the bankrupt’s normal outgoings, and also payment for basic roadside emergency cover with a motoring assistance organisation may be included. It should be noted that an individual who is in receipt of the higher rate of the mobility component of Disability Living Allowance or a War Pensioners Mobility Supplement,  or who has an invalid carriage,  may be entitled to a free tax disc, so this needs to be taken into consideration when including any allowance for motoring expenditure where a bankrupt is in receipt of these benefits.  Also where an individual uses a Motability contract hire vehicle,  Motability will arrange to tax the vehicle annually at no cost to the person using the vehicle.   For further information on entitlements to a free tax disc see the directgov website at:

http://www.direct.gov.uk/en/DisabledPeople/MotoringAndTransport/Yourvehicleandlicence/DG_10028003

 

See Chapter 31.2 for more detailed information concerning the treatment of motor vehicles.

31.7.125 Allowance for season tickets and other transport costs

Reasonable expenditure for bus or rail travel (including season tickets or passes) should also be considered as part of the normal outgoings of the bankrupt to allow him/her to get to their employment and/or meet the reasonable domestic requirements of themselves and their family.  Where  monthly outgoings claimed for travel exceed the amount suggested by the HES for an equivalent family group, the official receiver should request further information from the bankrupt and will need to consider the bankrupt and his/her family’s individual circumstances and location when deciding whether the expenditure claimed is reasonable.

 

 

[On to Part 5] [Back to Part 3]

 

 

him/herself and his/her family, but is also repaying a bankruptcy debt. Where the bankrupt continues to make high mortgage repayments this is likely to be at the expense of his/her unsecured creditors, and the official receiver should consider whether he/she should seek to disallow a fair share of the payments being made in respect of any joint liability.  The official receiver should also investigate with the bankrupt the possibility of extending the repayment terms of the mortgage, thus reducing the amount to be paid on a monthly basis and increasing the amount of income available to be included in an IPA or IPO. Factors which should be considered include the possibility that renegotiating the terms of a mortgage (including payment holidays) and/or lengthening the mortgage period may give the lender an opportunity to make the bankrupt liable for any mortgage shortfall post bankruptcy.

The judgment in Malcolm v Official Receiver [1999] B.P.I.R. 97 [note 4] considers the possibility of obtaining an IPO against a bankrupt who may not have an obvious surplus of income over expenditure because the mortgage payments made by the bankrupt are excessive and/or the payments are being made by the bankrupt on behalf of himself/herself and one or more other persons with separate income(s),  who might be expected to make some contribution towards the mortgage payment. Further information on the Malcolm case can be found at paragraph 31.7.86).

31.7.85 Pursuing IPAs/IPOs where mortgage payments appear excessive

Whilst the official receiver would not wish to make a bankrupt homeless through the pursuit of an IPA/IPO, he/she should continue to pursue an agreement to make income payments contributions,  where the bankrupt has sufficient surplus income taking in to account his/her reasonable domestic needs and where mortgage payments appear excessive. Care should be taken when assessing outgoings to identify any liability for mortgage obligations in addition to the family home, e.g. if the bankrupt’s income is being used to supplement mortgage payments for properties owned with or by other family members such as partners, spouses, parents, in-laws or children.  The official receiver should consider whether the subsidising of such payments gives the bankrupt an equitable interest in the relevant property.  Usually such payments should be disallowed when considering the bankrupt’s expenditure and the mortgagee should be left to consider its position having regard to its security.

Where mortgage payments are considered excessive this may involve the official receiver in pursuing an income payments order, by seeking to disallow excessive mortgage payments, as in the case of Malcolm v Official Receiver [1999] BPIR 97 (see paragraph 31.7.86).

 

31.7.86 Malcolm v Official Receiver [1999] B.P.I.R. 97 – requirement to seek alternative rented accommodation

The case in April 1998 of Malcolm v Official Receiver [1999] B.P.I.R. 97 (Judge Mr Justice Rattee) [note 4] is the long-standing authority for the proposition that the official receiver may explore proposals to reduce payments by way of mortgage instalments, which may involve finding alternative accommodation, so that a bankrupt would be able to make significant payments for the benefit of his/her creditors. In this case the official receiver applied for an IPO, demonstrating in his application to the court that Mr Malcolm had sufficient surplus income after a reduction in his (excessive) mortgage outgoings,  to make payments of £105 per month.  At the initial hearing it was accepted that the bankrupt was unable to pay this amount until he found alternative accommodation, so the Judge made an interim order for payments of £50 per month for a period of three months and ordered that the matter was to be reviewed before the court at the end of this period.

As the bankrupt had not found alternative accommodation so was not in a position to pay even the £50, Judge Rattee upheld an appeal against this order from Mr Malcolm,  but only on the specific understanding that the matter  was to be brought back before the court, and that at the later hearing, the bankrupt would have to provide carefully worked out proposals to reduce the mortgage instalment payments,  which would involve finding alternative accommodation.

Where suitable (not necessarily equivalent) rented accommodation is available to the bankrupt in the same or similar area (having regard for the family’s domestic needs and circumstances), and is significantly cheaper than the cost of the mortgage payments claimed by the bankrupt, a view will need to be taken by the official receiver as to whether an amount equivalent to the rented accommodation is allowed rather than the total mortgage repayment amount claimed by the bankrupt.

31.7.87 Consideration of regional cost variations and rental deposits

Regional variations in the costs and availability of rented accommodation will need to be considered by the official receiver when calculating the reasonable domestic requirements of the bankrupt.  As a result of the requirement to pay a deposit when entering a rental contract, it may be necessary to delay the commencement of an income payments agreement to enable the bankrupt to accumulate the necessary funds to make the deposit payment , this action in the long term being beneficial to the estate by increasing the funds available to be paid later under the IPA/IPO. However, any delay in commencement of the IPA/IPO must take in to account that an IPA has to be signed by the bankrupt and the official receiver or trustee prior to the date of discharge.

31.7.88 Other considerations relating to the removal of the bankrupt and his/her family to alternative accommodation

In considering whether alternative rented accommodation is suitable for the reasonable domestic needs of the bankrupt and his/her family, the stage a child has reached in his/her education (for example where he/she needs to remain at the same school to complete a significant exam year) or the care needs of a dependant (e.g. day care or respite care) will need to be considered by the official receiver.  These matters should be taken into account when making any decisions regarding the flexibility of the bankrupt and his/her family in moving to alternative rented accommodation. It may also be necessary to delay collections under an IPA or agree a payment holiday (for example for 3 to 6 months) to allow the bankrupt to find alternative accommodation.  

Official receivers should check with their local council for guidance as to the accommodation allowances considered when calculating eligibility for council accommodation or in relation to  privately rented accommodation,  using the Local Housing Allowance (LHA) to work out Housing Benefit entitlement. LHA is used to work out the Housing Benefit entitlement of tenants renting private sector accommodation in England and Wales and the guidelines used by the council relevant to the area in which the bankrupt lives may be of assistance to official receivers in calculating what the minimum accommodation requirements might be for a bankrupt and his/her family within a similar area to their current accommodation.

Access to the direct.gov website containing details of the LHA and contact details for various local  council websites can be found at: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/BenefitsTaxCreditsAndOtherSupport/On_a_low_income/DG_10018928

There is also guidance available as to the criteria used by councils and housing associations when assessing eligibility for council house accommodation at: http://www.direct.gov.uk/en/HomeAndCommunity/Councilandhousingassociationhomes/Councilhousing/Applying/DG_188706

Further information on the LHA and eligibility criteria can be found at:
https://lha-direct.voa.gov.uk/Secure/Default.htmx

31.7.89 Payments to additional secured creditors

(Amended April 2011)

Where there are additional secondary secured creditors the official receiver should take into account all payments to be made.  Where there is no equity available to secondary charge holders, the official receiver should not include any payment to these creditors in an income payments calculation as there is no enforcement action that can be taken in respect of these debts as the asset is already fully charged, and as, in effect, the secondary charge holder is an unsecured creditor, any payment to it could be considered to contravene the provisions of section 285(3) of the Insolvency Act 1986.

31.7.90 Applying to court for an IPO where bankrupt disputes mortgage payment is excessive  

If the official receiver’s income payments calculation,  taking into account reasonable domestic expenditure but disallowing part of the mortgage repayments, suggests that the bankrupt has sufficient surplus to collect payments under an IPA but the bankrupt wishes to continue making excessive payments and/or payments on behalf of third parties without receiving any contribution from them, the official receiver may consider applying for an IPO rather than an IPA, following the judgment in Albert v Albert (A Bankrupt) (1996) BPIR 232 [note 5].   The official receiver must report the full facts to the court to allow the court to decide whether the bankrupt's claim that the expenditure is reasonable should be allowed.

31.7.91 Bankrupt to be encouraged to attend IPO hearing where mortgage payment disputed

Wherever possible the official receiver should encourage the bankrupt to attend the IPO application hearing, particularly where the effect of such an order might mean that the bankrupt can no longer meet the mortgage commitment, which may lead to the sale of the property. The bankrupt's attendance will allow the court to hear his/her views and possible proposals for dealing with the situation, which may include a voluntary sale of the property

Section (b) Communications

31.7.92 Mobile telephone costs

Costs must be reasonable when compared with average expenditure for telephone costs as detailed in the HES. It may be necessary to disallow part of the monthly amount claimed if the claim is above average and use of the mobile telephone can be shown to be predominantly for social purposes only. Where the bankrupt uses the mobile phone for business calls, the official receiver should establish whether the bankrupt's employer provides re-imbursement for this usage (or if self-employed, whether the bankrupt claims expenses for this usage from the business in addition to any other drawings/income they have already declared).  The re-imbursement can be included as additional income to off-set against the total expenditure claimed, or the work-related portion of the claim for mobile phone usage could simply be disallowed.  The same principle could also be applied where a bankrupt uses their landline home telephone for business as well as personal calls.

Where the bankrupt claims that use of a mobile phone is essential, but costs claimed have been reduced or disallowed by the official receiver/trus