December 2010

Annex A

The assessment of real disposable income where the bankrupt's income is derived from state benefits

1. "State benefits” refers to all forms of income supplement and support provided by central or local government including, but not limited to:- income support, job seekers allowance, disability living allowances, incapacity benefit, council tax benefit, housing benefit, state retirement benefit, child benefit and all forms of tax credit (child, working and pension).

2. On the basis of Counsel's advise, once a benefit is paid to an individual, it may be considered to be income and thus, for persons against whom bankruptcy orders are made, it falls within the scope of section 310(7) of the Insolvency Act 1986. This confirms the possibility of obtaining an income payments agreement, or order, against a bankrupt whose sole source of income is state benefits.

3. As a matter of public policy, official receivers should not seek an IPA, or IPO, where the bankrupt's sole source of income is state benefits. No calculation of real disposable income need be made in such cases.

4. If the bankrupt has any income from any other source a calculation should be made to establish the real disposable income. The total income should be established with reference to the guidance in Part 3 of the Technical Manual, including any state benefits which the bankrupt, or family members, are entitled to receive. The reasonable domestic expenses of the bankrupt, and his/her family, should then be deducted (see Part 4). An assessment should then be made as to whether the bankrupt has a surplus income which would support an IPA or, less often, an IPO.

5. Where the bankrupt’s income does not include any form of state benefit, an IPA or IPO may be assessed in the usual way.

6. If the bankrupt has income which is a mixture of earned and/or other income, i.e. receipts from a private or occupational pension, and state benefits, an IPA or IPO should be assessed in the usual way but the amount claimed under the IPA or IPO must not exceed the amount of income from sources other than state benefits. Examples to assist in the calculation are set out below.

Calculation

7. The initial calculation should be the same in all cases, as if all of the income of the bankrupt and their family were earned. In cases where the income includes one or more state benefits an adjustment should be made to the amount assessed under the IPA to ensure that the IPA payments are made only from earned income.

Scenario 1

The first example assumes only the bankrupt's income and expenditure are relevant to the calculation.

Example 1 - all income is earned.

For all new income payments calculations made after 1 December 2010 the full amount of this surplus income (£490) will be sought.

 Example 1.1 - bankrupt receives a part of this income from state benefits.

On the basis of the above an IPA of the full amount of the surplus (£490) could also be sought in new income payments calculations made after 1 December 2010, as this amount is less than the amount of earned income.

Total to be collected under the IPA is £17,640.

 Example 2

On the basis of the above an IPA for the full amount of the surplus (£490) would exceed the level of earned income.

The IPA should be capped at the full amount of the earned income (£300). A  total IPA of £10,800.

Scenario 2

The following calculations include the income of a spouse and a division of the outgoings. This will produce different effects depending on which partner receives the state benefits.

Example 3

H provides 68% of the total household income and, using the income payments calculator, H's real disposable income is £335. An IPA of the full amount of this surplus income (£335)  is recommended.

Total IPA is £12,060.

 Example 4

As the bankrupt’s income is solely derived from state benefits no IPA would be sought.

 Example 5

In example 5 the recommended IPA level (£490) exceeds the amount of H's earned income.

The IPA would therefore be applied as the full amount of the bankrupt's earned income (£175). A total IPA of £6,300.

8. It should be remembered that whilst the bankrupt's total income (including state benefits and any contributions from other members of the household) should be included in the calculation of surplus income, it is the income of the bankrupt from sources other than the benefit(s) and family members which is providing the payments.