Part 2 Earned and unearned income
This part of the chapter deals with a number of different sources of income, both earned and unearned. The part looks at income from employment, income from annuities, income from trusts, redundancy payments, and a number of other sources.
A bankrupt should retain sufficient of his/her income to meet his/her reasonable domestic needs, including the needs of his/her family even though his/her income is not described as exempt property in section 283. A bankrupt can consent to an income payments agreement if he/she has income in excess of his/her domestic needs [Note 1]. Where a bankrupt refuses to consent to an income payments agreement and the trustee believes he/she has sufficient surplus income to make a regular payment an application may be made to the court for an income payments order [Note 2]. An income payments agreement must come into effect (signed by the bankrupt and official receiver/trustee) before discharge. An income payments order must be instituted (application made) before discharge. Further information on income payments agreements and income payments orders is contained in Chapter 31.7.
An annuity is a way of obtaining an income. A lump sum is paid, usually to a life assurance company, and in return a predetermined income is paid, often until the annuity purchaser’s death. The “annuity rate” reflects the annual income to be received as percentage of the lump sum invested. An “annuity rate” of 7.5% would provide an annual income of £750 for every £10,000 invested. A basic annuity (see paragraph 31.5.22) cannot be revoked.
An annuity can be purchased by anyone. However the younger and fitter a person is the lower the annual income offered. In practical terms it is unlikely that the annual income would be sufficient to justify a younger person giving up their capital for an annuity. Although annuities obtained by a young person with a decreased life expectancy due to ill-health may offer a higher income.
There are several types of basic annuity:
The official receiver should obtain full details of the annuity. The official receiver should establish whether the annuity is to be treated as exempt property as it may be part of the bankrupt’s pension provisions (see paragraph 31.5.25 for advice on when annuities should be treated as exempt property) [Note 3]. The official receiver should establish whether a company or bankrupt has made excessive contributions to the annuity as these may be recoverable (see paragraphs 31.4B.83 and 31.4B.178 to 31.4B.183). One indication of excessive contributions may be where one or more third parties benefit from the annuity payments.
The most common form of annuity is the conversion of a pension lump sum built up over a working life. The types of pension suitable for the purchase of an annuity include, amongst others, a personal pension, a stakeholder pension or a group personal pension plan arranged through your employer. Further information on pensions is contained in Chapter 61.
Section 11 (2)(g) of the Welfare Reform and Pensions Act 1999 states that an annuity purchased to give effect to an approved pension scheme is excluded from a bankrupt’s estate. Paragraph 61.4 provides a list of pensions schemes to which this section applies. Where the annuity is part of an unapproved pension scheme the official receiver should follow the advice given in paragraph 61.8 as some unapproved pension arrangements may be treated as exempt property.
Whilst a number of basic annuities will be treated as exempt property (see paragraph 31.5.25) the official receiver may encounter annuities which do form part of the bankrupt’s estate. In such instances the company paying the annuity should be asked to continue making the payments to the bankrupt’s estate [Note 4]. The annuity payments to the estate may continue for years after the bankrupt’s discharge and will only stop when the cessation terms of the annuity apply, for example after a fixed period of time or upon the death of the bankrupt. The bankrupt may argue that the annuity should be treated as income and be part of an income payments agreement or order under section 310 of the Insolvency Act 1986. In this instance the official receiver are advised to resist such an argument and to seek further advice from Technical Section.
The official receiver may encounter a non-basic annuity (see paragraph 31.5.22 for details of a basic annuity) which is not exempt property and consequently forms part of the bankrupt’s estate. The official receiver should check the terms of the annuity (see paragraph 31.5.23). Where an annuity is paid to the bankrupt the official receiver should ask for the payments to be made to the bankrupt’s estate [Note 5]. Where the bankrupt subsequently dies it may be necessary to obtain specialist advice to see if the trustee can continue to receive the annuity income. If such a circumstance should arise the official receiver should contact Technical Section.
Where a winding-up order is made against a company which has granted a lease or tenancy over a company owned property the company remains landlord and must comply with its duties and obligations as landlord or otherwise seek to end the tenancy. The company’s interest in rent from the tenants continues after the making of the winding-up order. The official receiver does not become the landlord but as liquidator of the company should act appropriately as he/she will be accountable for the company’s actions. Guidance on dealing with commercial property owned by the company is provided in Chapter 31.3 – Freehold and Leasehold Property.
Guidance on dealing with rental income from property solely owned by the company is provided in paragraph 31.11.209 initially, and in more detail in Parts 2 and 3 of Chapter 31.11 – Solely Owned Tenanted Property. Guidance on dealing with rental income from property jointly owned by the company and others is provided in paragraph 31.12.210 initially, and in more detail in Parts 3 and 4 of Chapter 31.12 – Jointly Owned Tenanted Property. The official receiver should not apply for the early dissolution of such a company and should follow the advice given in 31.11.210 and 31.12.211.
At the date of the bankruptcy order a bankrupt may be letting a solely owned property which is not his/her residential home. The official receiver should follow the detailed guidance on dealing with solely owned tenanted property in Chapter 31.11. In particular the official receiver can find advice when acting as receiver and manager in paragraphs 31.11.29 to 31.11.35, and guidance when appointed trustee in bankruptcy in paragraphs 31.11.98 to 31.11.108. The official receiver can find advice on when rent should not be collected in paragraph 31.11.104 and when the collection of rent should stop is covered in paragraph 31.11.101.
At the date of the bankruptcy order a bankrupt may be letting a jointly owned property which is not his/her residential home. Where the bankrupt has a beneficial interest in a jointly owned property the solvent owner can collect the rent but must account to the trustee in bankruptcy for the profits. The official receiver should follow the detailed guidance on dealing with jointly owned tenanted property in Chapter 31.12. In particular the official receiver can find advice when acting as receiver and manager in Part 1 of Chapter 31.12 and guidance when appointed trustee in bankruptcy in paragraphs 31.12.96 to 31.12.105. The official receiver can find advice on when the collection of the bankrupt’s share of the rent should stop in paragraph 31.12.100.
Where an individual is made redundant they may receive compensation for loss of employment covering, for example, a redundancy payment, payment in lieu of wages (see paragraph 31.5.35), outstanding wages and/or holiday pay. A redundancy payment is compensation for the loss of employment. Although the amount of the redundancy payment is related to past salary and the length of service it is not compensation for loss of earnings [Note 6]. A redundancy payment will be paid to a redundant employee even where the employee immediately starts alternative employment at a higher wage. As a result a redundancy payment is not “income” but property which vests in the trustee in bankruptcy. The official receiver should resist any attempt by the bankrupt to argue that a redundancy payment is part of his/her income.
Where the employment has ended prior to the date of the bankruptcy order and the bankrupt is waiting for payment the money owed forms part of the estate and vest in the trustee in bankruptcy. The official receiver should obtain details of the payer (either a private employer or the Redundancy Payments Services) and arrange for the redundancy payment element to be made directly to the trustee in bankruptcy.
Where a bankrupt has received notice of redundancy but has not yet had his/her employment terminated at the date of the bankruptcy order the right to receive a redundancy payment has not yet arisen. The attention of the bankrupt should be drawn to the obligation of the bankrupt to notify the trustee in bankruptcy should he/she acquire any property, which includes redundancy payments [Note 7]. The bankrupt should be asked to acknowledge his/her obligations in writing. Any such payment should be claimed by the trustee in bankruptcy within 42 days of becoming aware of the redundancy payment as after-acquired property [Note 8]. The same applies to any redundancy payments paid between the date of the bankruptcy order and the date of discharge. Where the trustee in bankruptcy makes a claim for a redundancy payment as after-acquired property he/she should obtain details of the payer (either a private employer or the Redundancy Payments Services)and arrange for the redundancy payment element to be made directly to the trustee in bankruptcy.
Payment in lieu of notice is compensation where an employer makes an employee redundant and fails to give a statutory period of notice. Payment in lieu of notice is paid irrespective of whether the employee obtains alternative employment immediately. An individual receiving payment in lieu of notice is also entitled to claim state benefits immediately. A payment in lieu of notice is, therefore, not “income” but property which vests in the trustee in bankruptcy. Payment in lieu of notice will either be an asset in the bankruptcy or can be claimed as an after acquired asset. To realise the asset the official receiver should follow the guidance in paragraphs 31.5.33. Where the payment in lieu of notice is made by the Redundancy Payments Service the amount paid is limited by statute and subject to mitigation. The amounts paid within the statutory limits will be reduced by any earnings or benefits received during the statutory notice period. Further details on the amounts paid by Redundancy Payments Services may be obtained here.
In the majority of cases state benefits do not vest in the trustee in bankruptcy. Any income related benefit, jobseekers allowance, state pension credit, child benefit or other defined benefit [Note 9] shall not pass to any trustee or other person acting on behalf of the beneficiary’s creditors on the bankruptcy of the beneficiary [Note 10]. In practice this definition of benefits is wide enough to cover all benefits likely to be encountered. Only a small number of benefits are excluded, referred to as “old cases payments”, and cover benefits payable in respect of industrial diseases and workmen’s compensation under the various Workmen’s Compensation Acts.
Where a bankruptcy order was made on or after 1 September 2004 all outstanding student loans are not provable debts [Note 11]. No part of a student loan may be claimed as part of the bankrupt’s estate, as after acquired property or as part of an income payments agreement or order [Note 12]. Further details can be found in paragraph 40.92.
Where the bankrupt is in receipt of an occupational or private pension the official receiver should follow the advice in Chapter 61 – Pension Schemes when deciding if the pension forms part of the bankrupt’s estate or for assessing an income payments agreement or order.
(Amended May 2013)
The official receiver should follow the guidance provided in Chapter 31.10 Annex 1 paragraphs 2-19 in relation to copyright and the receipt of royalties. In particular Chapter 31.10 Annex 1 paragraph 15 explains whether copyright is an asset in the proceedings.