HOUSING QUALITY NETWORK BRIEFING
PAPER
Dealing with personal
insolvency
Edward Cook
May 2007
HOUSING QUALITY NETWORK BRIEFING PAPER
Dealing with personal insolvency
Key points
• There have been huge increases in recent years in numbers of bankruptcies and
individual voluntary arrangements (IVAs) caused by personal debt problems
• If a tenant goes into bankruptcy, arrears of rent should be claimed from the Trustee
in Bankruptcy. The landlord can still evict the tenant under breach of tenancy
agreement
• If the tenant stays in occupation, the tenant is liable to pay current rent as normal
• Pre-bankruptcy benefits overpayments cannot be recovered out of post-bankruptcy
benefit payments. However, post-bankruptcy overpayments can be recovered out of
these post-bankruptcy payments
• The effective date for bankruptcy claims is the date of the Bankruptcy Order (not the
petition date or the discharge date)
• The rules for IVAs are the same as for bankruptcy as regards claims for arrears of
rent, future rent payments, and benefit overpayments. The effective date for an IVA
is the date on which the IVA proposals are approved by creditors at a meeting
called for that purpose
• The rules in Scotland are different from England and Wales and are not addressed
in this briefing.
Introduction
There is an increasing personal debt problem in the UK. In 2006 more than 105,000
individuals in England and Wales were declared bankrupt or entered into an IVA with their
creditors. The number of voluntary arrangements has doubled between 2005 and 2006.
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Number of Insolvencies in England and Wales (seasonally adjusted)
Percentage change
2005 2006 2006 2006 2006
Q4 2006 on:
Q4 Q1r Q2r Q3r Q4p
Q3 2006 Q4 2005
Individuals
20,679 23,531 26,125 27,828 29,804 7.1
44.1
of which:
Bankruptcies 13,675 15,321 15,002 15,569 17,063
9.6
24.8
IVAs
7,004 8,209 11,122 12,259 12,741
3.9
81.9
p = provisional, r = revised
Tenants of housing associations and councils will be just as much at risk as others and in
the course of rent collection, issues will arise as a result of tenants entering into
bankruptcy or an IVA with their creditors. (ALMOs act as agent for the council and
therefore have the power to act as landlord which is delegated to them.)
What is bankruptcy? An individual who is unable to pay his debts as they fall due is insolvent and it is possible
for a creditor who is owed more than £750 to petition for bankruptcy. As a prelude to this
procedure it is usual for the debtor to be served with a statutory demand from the creditor.
The debtor has 21 days in which to object or settle the debt, after which the creditor can
proceed to petition for bankruptcy at the court. It is also possible for the individual to
petition for his own bankruptcy. In both cases the effect of bankruptcy is to freeze all
claims against the individual and the trustee takes charge of the bankrupt’s assets.
Whilst bankrupt, the debtor cannot buy on credit or borrow money, and he cannot be a
company director or hold certain offices
. Where a housing association or ALMO is a limited
company, a director who becomes bankrupt must resign immediately. If he does not
resign, the board of directors should have him removed on the grounds that he is
committing a criminal act by remaining a director whist bankrupt. As Industrial and
Provident Societies (IPSs) are not registered under the Companies Act 1985, the same
restrictions do not apply to their officers. However, to continue to be an officer of an IPS
would be inappropriate following bankruptcy in view of the fiduciary responsibilities
attached to acting as an officer of an IPS.
The bankruptcy order normally lasts for one year (the minimum period used to be three
years but this was relaxed in the Enterprise Act 2002). Bankruptcy Restriction Orders can
be made to extend the bankruptcy for longer than one year, and if the debtor does not co-
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HOUSING QUALITY NETWORK BRIEFING PAPER
operate with the trustee his discharge can be opposed at the end of the normal bankruptcy
period.
During the course of the bankruptcy it is possible for the trustee to seek an Income
Payments Order whereby any excess earnings over the bankrupt’s basic cost of living are
to be paid over to the trustee. This forms a fund out of which a dividend can be paid to the
creditors at the end of the bankruptcy. The balance on debts in the bankruptcy is written
off.
The debtor who is bankrupt will remain on the bankruptcy register for six years and this will
affect his credit rating in the future.
What is an IVA? As an alternative to bankruptcy a debtor can make a proposal to his creditors, usually to
make a payment out of his future income to his supervisor on a monthly basis for up to five
years. In return for agreeing to this arrangement, the creditors agree to take no action in
respect of outstanding debts during the period. This has a similar affect to bankruptcy in
that all the debts are frozen, but to approve the proposals, the creditors are invited to a
meeting at which the details of the proposals are discussed.
It is the usual practice that a minimum dividend of 25 pence in the pound needs to be
offered to creditors after costs have been met and the main credit card companies are not
prepared to consider IVAs unless the total debts exceed £15,000.
The proposals need to be approved by 75% of the creditors in value and the supervisor
then oversees the receipt of monthly payments from the debtor. If the debtor fails to make
payments as promised in the proposals or fails to co-operate with the supervisor, the
voluntary arrangement can be failed and the supervisor is often required to petition for
bankruptcy in those situations. On completion of the voluntary arrangement, creditors will
be paid a dividend and the balance on the debts in the voluntary arrangement has to be
written off. As with bankruptcy, the credit rating of individuals who go into a voluntary
arrangement can be affected in the future.
What should landlords do?
If a tenant tells you that he is bankrupt or is in an IVA he is still liable for future rent and
should pay it in the normal way as an ‘essential payment’. Although the trustee can apply
to the court for an Income Payments Order, in agreeing any figure to be paid over, the
trustee must make an allowance for essential living costs, which includes rent. If the tenant
is continuing in paid employment there should be no excuse for not paying rent. Similarly
in an IVA the tenant is permitted to pay reasonable rent and living costs before he has to
pay the supervisor a contribution out of surplus income.
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Bankruptcy and IVA status is no reason for the debtor to withhold payment of future rent,
but arrears of rent should be claimed in the bankruptcy or IVA as an unsecured debt.
Unpaid service charge is treated in the same way as for rent. It ranks as a debt in the
bankruptcy.
It can be argued that landlords are in a stronger position to collect rent from employed
tenants simply because there are fewer demands on their income. Before bankruptcy or
an IVA was put in place, the credit card companies would be pursuing the tenant for
payments. Once those claims have been frozen by bankruptcy or an IVA, the tenant can
make sure that the rent is paid promptly.
If a tenant has little or no income because he is out of work, that is a different matter. Most
local authorities have a discretionary housing payment (DHP) fund, which could be used to
top up the HB payments if there is a shortfall. It may be in the council’s interest to provide
this support to avoid having to face dealing with an eviction which itself will create an
urgent housing problem. The DHP would often be a cheaper option than having to re-
house the individuals. However when an application for a DHP is made, the HB
department will generally only consider the income and expenditure of the claimant, when
deciding whether to award a DHP.
At the time of bankruptcy or entering an IVA the debtor is required to provide a full list of
his creditors to the trustee or supervisor.
In bankruptcy, a circular letter will be issued to all known creditors with the notice of
appointment, a proof of debt form, a proxy form and a copy of the statement of affairs of
the debtor. In respect of the rent arrears landlords should complete the proof of debt form
which sets out the details of the debt, the period that it covers and the amount together
with a proxy form that provides the opportunity to vote for the resolutions which may be put
to a meeting of creditors. Normally these matters are routine and include the authorisation
of the trustee to be paid on a particular basis, usually on time costs. These resolutions are
in a standard format and as long as the trustee carries out his duties efficiently and
professionally, creditors usually accept this basis.
Depending on the complexity of the debtor’s finances, the trustee may ask the creditors to
attend a creditors’ meeting where a creditors’ committee can be appointed. There is no
obligation on creditors to attend the meeting and often a short report is circulated in
advance with the notice of the meeting. Creditors do not often attend the meetings though
on particularly large cases the banks and lending institutions will send representatives to
ask appropriate questions. A committee of creditors can be formed to assist the trustee in
carrying out his duties. It is very rare for committees to be formed unless there are
particularly complex or large figures involved.
In IVAs, as well as the proxy form and proof of debt, creditors will be issued with a set of
proposals, setting out the rules for the conduct of the IVA. These normally consist of a
monthly payment being made by the debtor out of which the costs of the IVA will be met
and a dividend paid to creditors. The proxy form gives the creditors the opportunity to vote
on the proposals, without the need to attend the meeting.
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Dividend prospects
On small bankruptcies with nil assets the prospect of any dividend payment to creditors is
extremely small. However, in the case of IVAs, there is a greater prospect of a dividend as
approval is only given where there are genuine reasons to believe that the debtor can
make future payments out of surplus income.
Benefits and overpayment recovery
The fundamental principle of being entitled to benefits is unaffected by the bankruptcy or
voluntary arrangement status of an individual.
At the time when a bankruptcy order is made, any overpayment of benefits will rank as a
debt in the bankruptcy estate. Subsequently, after the bankruptcy date, new benefits will
become payable to the debtor. As these post-bankruptcy benefit payments were not due at
the time of the bankruptcy, in law there is no mutual set-off between overpayments
recoverable by the benefits office and future benefits payable.
For this reason, overpayments due to be recovered should not be deducted from benefits
payable after bankruptcy. Overpayments remain a claim in the bankruptcy.
At the end of the bankruptcy period (usually one year) the debtor can apply for discharge.
As any overpayment made before the start of the bankruptcy was taken into account in the
bankruptcy procedure, it is not a debt which can be collected after bankruptcy. The
Insolvency Act states that the bankrupt is released from all bankruptcy debts on his
discharge with the exception of fraud, fines, confiscation orders, and family proceedings.
There is no provision for collection of overpayments after discharge unless arising through
fraud. A recent High Court case (Balding versus DWP) has confirmed this point. At the
appeal handed down on 3 April 2007, the decision was upheld. As a result of this decision,
overpayments arising before bankruptcy should be claimed from the trustee and any
balance of the recoverable overpayment remaining after dividends must be written off.
Any overpayments arising after the bankruptcy has commenced can, of course, be
recovered in the normal way.
In the case of IVAs, the rules are the same as for bankruptcies except that the effective
date is the date on which the IVA proposals are approved by creditors at a meeting called
for that purpose.
Leaseholder debts
Unpaid costs of major repairs which are due under the terms of a lease are again treated
as part of the total debt claimable in bankruptcy. There may be forfeiture provisions in the
lease which come into play in these circumstances. You need to examine the terms of the
lease carefully and take legal advice before action.
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Conclusion
Personal insolvency of tenants need not be a hindrance to rent collection where the tenant
has ongoing income. Equally where a tenant is on benefits, the right to receive benefits is
unaffected by bankruptcy or IVA. The landlord is entitled to receive rent for current
occupation out of current income/benefits and the prospect of the landlord being paid is
actually improved as a result of bankruptcy or an IVA. That is simply because there are
fewer demands on the debtor’s income as all claims in bankruptcy and IVA are frozen. It is
important that the landlord makes a claim in the bankruptcy or IVA for any arrears of rent
to ensure that if there are any dividend prospects to creditors, payment will be received in
time.
Note the rules in Scotland are different from in England and Wales and are not covered in
this briefing.
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