New legislature means Bankrupt debtors will be given £10 a month to spend for three years. But critics say this serves only to extend their misery

December 2010 saw the introduction of  new rules which state that UK bankrupt individuals must hand over all their “disposable income” to their creditors for three years and can no longer keep any of it for themselves. Previously, many will have paid just half to the people they owed.

On the face of it, the regime will mean no pints down the pub (unless someone else is buying), no cigarettes, and no visits to the golf club.

One commentator claims the new guidelines, which came in very quietly, mean bankrupts face “three years of misery”, putting them at greater risk of further financial problems or mental health issues.

But the Insolvency Service defends the changes, saying it is all about “striking a balance”. It said: “We are not saying [to bankrupts]: we want you to live on gruel and wear threadbare clothes. This is a reasonable approach.” And it says each member of the household will be allowed £10 a month spending money – so perhaps an occasional pint isn’t completely out of the question after all.

Bankruptcy rules are fair

The rules concern disposable income payments, the payments those who are Bankrupt can afford to make to the people to whom they owe money.

When a bankrupt individual agrees to make regular payments to his or her creditors it is called an ‘Income Payments Agreement’ (IPA). If they don’t play ball a court can issue an ‘Income Payments Order’ (IPO) that forces them to hand over money. While bankruptcy usually lasts for 12 months, an IPA or IPO normally runs for three years.

Officials will look at your finances to decide how much you should contribute. They will deduct “reasonable” domestic expenses – mortgage or rent, utility bills etc – from your income, then see what is left over.

James Falla, senior debt expert at Beat My Debt believes that the rules on IPAs remain fair.

“It is wrong for people to assume that if they are declared bankrupt they will be left with nothing to live on. There is a very comprehensive list of allowable living expenses which cover everything from rent or mortgage payments down to school dinner money, eye tests and entertainment expenditure. A bankrupt will only have to pay after all of these things have been budgeted for” he said.

All surplus income now payable

Previously, bankrupts would typically pay 50%-70% of their disposable income to their creditors for three years. In other words, he or she could keep hold of a decent chunk of the money left over every month.

But the new Insolvency Service guidelines state: “Normally you will be expected to pay all of your disposable income every month as your IPA or IPO payment. So the more disposable income you have, the more you have to pay.”

Another official document puts it more bluntly: “The bankrupt no longer retains any of the remaining surplus income once all their reasonable household expenditure is accounted for.”

Rent or mortgage payments that are appropriate for where you live and the size of your family, plus heating and lighting, are all likely to be deemed reasonable expenses, the Insolvency Service says.

Critics

One of those sharply critical of the new regime is Neil Faulkner. Writing on the lovemoney.com website, he says: “Bankrupts now face a typical three years of misery … forcing them under crisis to consider unlicensed loan sharks, and discouraging hard work or productivity. The net result of this badly calculated new policy is likely to be debilitating misery.”

Graham Horne, deputy inspector general of the Insolvency Service, says it had been keen to bring its policies in line with what happens with Individual Voluntary Arrangements, which allow people to restructure their debts and avoid bankruptcy.

“It used to be that the bankrupt could retain a surplus over and above what he needed to live on. That didn’t seem fair to creditors,” he says.

James Falla agrees. “I believe that with this change in the rules, the Insolvency Service has tried to bring in some parity between what someone might have to pay in an individual voluntary arrangement compared to bankruptcy. It is designed to change the view that bankruptcy is somehow an easy option” he said.

Horne points to the fact that bankrupts and their dependents will be granted an “allowance” of £10 a month to cover “sundries and emergencies”. So a family of four would have £40.