Uh-Oh Bad News For Bankrupts

[Democorruptcy]

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

Bankruptcy: Is there life after debt? New legislature means debtors will be given £10 a month to spend for three years. But critics say this serves only to extend their misery

Is it fair that someone who has been declared bankrupt is able to go to the pub or the gym, buy gifts and enjoy meals out – or should they only be left with enough money to pay their household bills and meet other necessary expenses?

The answer probably depends where you sit on the spectrum of opinion regarding bankruptcy: "bring back debtors' jails and workhouses"; "they've been through hell and deserve compassion"; – or somewhere between the two.

It's a debate that will continue to rage following the introduction in the UK of rules which state that 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. Meanwhile, someone claiming to work for the government's Insolvency Service contacted Guardian Money to say the policy is "causing real distress" to vulnerable people.

But the Insolvency Service defends the changes, saying it is all about "striking a balance". It told Money: "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.

The rules concern the payments those who are bankrupt, and who can afford it, 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/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.

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. So are food and clothing – though, presumably, posh grub from Harrods and expensive designer togs would be frowned upon. Other things likely to be allowed – and items that are likely to be disallowed unless there are special circumstances – are listed in the accompanying panel (below right).

There has also been another change. For all new IPAs (and IPOs), if the debtor's surplus income, over and above what they need to live on, is £20 a month or more officials will look to take this for their monthly payments. Previously, £50 a month was the lowest amount sought. That could mean many more bankrupts having to cough up.

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."

Meanwhile, the anonymous individual who wrote to us about the distress this is supposedly causing says: "The previous policy gave some notion of freedom of choice – ie, a bankrupt could spend their surplus on a gym membership. Now they have no share of the surplus, so effectively being made bankrupt means you are not able to go to the gym for three years."

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.

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.

Asked about the gym membership example, Horne says: "I'm not totally sure creditors would be that happy that someone might be going to the gym when they should arguably be using that money to pay towards their debts." However, they could always spend their £10 on going to their municipal gym.

http://www.guardian.co.uk/money/2011/mar/19/bankruptcy-life-after-debt

[spyguy]

Interesting to see what happens with bankruptcy terms.

Since NuLAb slackened the punitive bit - in order to help entrepreneurs you know, no cause of the personal+ BTL consumption binge - you can be in and out in 18 months rather than 5 years.

The new act allows for BR periods of 10 to 15 years but the vast majority just do 18 months -unless you were a compnay director and were caught doing something really dodgy.

ITo discourage people jack it in, I'd expect the ConDems to nodge the OR to take into account personal debt + mortgage and come up with a punitive period - say 7 years. That would ensure BRs have to work their balls off to pay back the debt.

[Democorruptcy]

Good news for the banks (as if anything ever isn't...) holding these debts

The mortgage payment to the bank is an allowable expense but the banks get their hands on their other income. No beer for bankrupts but champagne for bankers? Pity they won't pass anything on to savers via higher rates now they might have less debt to write off.

[anonguest]

For those with unsecured debts I have no doubt this sort of thing will merely further drive people who are struggling with debts, already contemplating it, to simply 'walk away' from their debts plain and simple.

I know, first hand, two people (and others via friends) who have recently done just that. Done their homework. Discovered that much of the perceived 'threat' to them for ceasing payments is merely myth - and have just walked away and stopped all contact with creditors and making any payments. their stress levels have plummeted and they now have disposbale income again (which I add they are using, having learned their lesson, to save for a 'rainy day' and provide a safety cushion in life).

I will continue to try and keep abreast of their situation but, so far, there is nothing to indicate any meaningful change/disadvantage to their lives and own personal circumstances. Their only regret being not having investigated their complete options more fully earlier on.

[R K]

Working for the banksters, forever. Even after debts discharged.

Diamond Bob strikes again.

With 18 yr olds now maturing into £80,000+ lifetime debts as well it's pretty clear the direction we're headed in.

The banksters aren't going to give up without a fight.

[sun n sea]

Even more good news for banks.... bankruptcy for all large banks and senior bankers was ruled illegal in 2008 by Messers Brown & Darling.

I can't think of a better incentive for people to start their own businesses.... a 3-7 year period of financial servitude as a penalty for even trying....

Whoever thought of this new policy is clearly a w@nker safely barricaded inside a public sector salary band with their @rses nicely cushioned by a fluffy unfunded final salary pension.

Abandon any ideas of a vibrant private sector led recovery..... anyone with half a brain will avoid starting their own business like the plague.

[Injin]

Working for the banksters, forever. Even after debts discharged.

Diamond Bob strikes again.

With 18 yr olds now maturing into £80,000+ lifetime debts as well it's pretty clear the direction we're headed in.

The banksters aren't going to give up without a fight.

They want everyone tethered, leashed. They will probably get it as well, but the problem is simple for them - tethering everyone ends almost all productivity.

It's as though a guy who is excellent at 3 card monte has used his skill with the cards to swindle the wealth from everyone. That's great and all but then what? Dizzy ******er is only good at 3 card monte, he has no clue how to grow crops or run anything real. So he has to put the people who just ran everything back in charge but as serfs.... but that can't possibly work, they only did what they did in the first place in order to be free.

[Ruffneck]

Compare how little people are treated when they go bankrupt to how the big banks are treated when they go bankrupt.

[interestrateripoff]

Compare how little people are treated when they go bankrupt to how the big banks are treated when they go bankrupt.

Perhaps the top banks should be limited to £10 per week pocket money?

[Self Employed Youth]

Whilst bankrupts shouldn't be treat as leniently as they are now. Limiting their disposable income to £10 will only put them all onto the dole.

By working they'll effectively be £2.50 a week better off before transport costs are taken into account.

Can you even get a return bus fare under £2.50 anymore?

So maybe 20p for the week? That's not even enough for a packet of polos.

40 hours+ 10 hours travel for half a packet of polos? These people will sign onto the dole!

[Ruffneck]

Perhaps the top banks should be limited to £10 per week pocket money?

I was thinking more of hard labor debtors prison camps for the CEOs and fat cats

[HPCatlast.]

Interesting to see what happens with bankruptcy terms.

Since NuLAb slackened the punitive bit - in order to help entrepreneurs you know, no cause of the personal+ BTL consumption binge - you can be in and out in 18 months rather than 5 years.

The new act allows for BR periods of 10 to 15 years but the vast majority just do 18 months -unless you were a compnay director and were caught doing something really dodgy.

ITo discourage people jack it in, I'd expect the ConDems to nodge the OR to take into account personal debt + mortgage and come up with a punitive period - say 7 years. That would ensure BRs have to work their balls off to pay back the debt.

So, is that the route taken by the serial entrepreneur Grant Bovey?

[ChumpusRex]

Whilst bankrupts shouldn't be treat as leniently as they are now. Limiting their disposable income to £10 will only put them all onto the dole.

By working they'll effectively be £2.50 a week better off before transport costs are taken into account.

Can you even get a return bus fare under £2.50 anymore?

So maybe 20p for the week? That's not even enough for a packet of polos.

40 hours+ 10 hours travel for half a packet of polos? These people will sign onto the dole!

I would have thought that travel to and from work would be considered a reasonable household expense. Indeed, it would be lunacy not to consider it as such.

As you quite rightly point out, in a situation where only a fixed personal discretionary income is premitted, the goals of the creditor and debtor are not aligned. There is no motivation for the debtor to earn more, and improve the outcome for the creditor.

In that regard, the idea of splitting discretionary income 50:50 is a reasonable one - however, it may not be the optimal split. Perhaps 25:75 in favour of the creditor would better - but realistically, I don't know how to work out what an optimal split would be.

[happy_renting]

Typical. A Grauniad hack who doesn't know the difference between legislature (sic) and legislation.

I blame the teachers. The ones that read The Grauniad.

[fiddle]

my info is a tad out of date (circa 2002) however travel was considered a reasonable expence, as was smokeing.. we had several bankrupts who knowing the systme had written that they smoked 40+ cigaretts a day. none of whom ever smelt of ciggies when they came in for meeting, or when we had to chase them up at their homes. there were plenty of other "essentials" which i personally disagrred with like pets.. one ladys cat apparently ate 4 tins of food a day.. she even provided the reciepts, pretty darn sure whe was selling 3 of them to her neighbours

people don't tend to give up work and do sfa, i think because they don't actually want to screw over their creditors on purpose, back then anyways people generally felt quite bad about it. not so much the banks but other people whome they owed money to. they may be the banks making loads of profit.. but most people with half a brain realise it's not the banks that suffer from their non payment, it's the other bank users. the banks rarely changes except to make up for money lost from then by charging other more.

also people were very aware that as soon as the bankruptsy is over they get to keep whatever wage they are on, and will have little or no credit availaibility for sime time after they have been discharged. so while they can't save any money while

interest is frozen on the money owed, so sometimes even if they couldnt have afforded to pay off the creditors under normal circumstances, this removal of interest can mean it is feasible, in which case any money left over at the ned of the bkr is given back to the bankruptee (minus the IPs fees of course)

dropping to a non working position makes things very difficult post bankrupsy, if youve stayed in work the credit rating bounces back relatively quickly, but no income and zero credit + yrs of inactivity on the work front doesnt lead to much prospects in the future.

part fo the benefit of a bkr is wiping the slate clean and starting again but from a vantage point of having income.. if you went unemployed you would literally be wiping the slate clean clean, so have less to build up from.

still am sure some people would see it as the best option. in my experience very few did, if anythign they did better in work. loosing the stress of the money owed gave them a better ability to focus on their job, knowing that financially they were actually protected by the IP and theat although sparce they were guaranteed a standard of living. i was surprised how many got promoted.

[SarahBell]

Are they changing allowances too so you can't keep full sky package too?

[miko]

Are they changing allowances too so you can't keep full sky package too?

Take a look on the MSE bankrupt forums , sky package is not allowed even internet access is not allowed unless you can prove that you need it for your work.

[Redcellar]

I may be in a minority here. Why is it OK to renague on an agreement? Bankruptcy was setup that way. I simply declare myself bankrupt and then expect to keep my money going fowards? What about the companies and people you owe money to folks.

I think the change is a good one. Maybe people will begin to act responsibly if they realise the potential troubles should they default on an agreement.

[Redcellar]

Take a look on the MSE bankrupt forums , sky package is not allowed even internet access is not allowed unless you can prove that you need it for your work.

What about a lottery ticket and a packet of fags. Both of those are essentials for a dole cheque aren't they?

[Britney's Piers]

What about the companies and people you owe money to folks.

They should be punished for their stupidity in lending the money in the first place, so I would say let the bankrupt live for a tenner for 1.5 years, the other half the lender will have to take a haircut on.

[Injin]

I may be in a minority here. Why is it OK to renague on an agreement? Bankruptcy was setup that way. I simply declare myself bankrupt and then expect to keep my money going fowards? What about the companies and people you owe money to folks.

I think the change is a good one. Maybe people will begin to act responsibly if they realise the potential troubles should they default on an agreement.

Well apart from the fact that all banking is fraud, the bankrupcy laws were known to the "lender" when they made the agreement and the interest rate should have reflected that.*

*Ignoring the fact that it's interest charges which cause bankrupcies at a systemic level of coure.

[Redcellar]

Well apart from the fact that all banking is fraud, the bankrupcy laws were known to the "lender" when they made the agreement and the interest rate should have reflected that.*

*Ignoring the fact that it's interest charges which cause bankrupcies at a systemic level of coure.

Mortgages are one thing. You fail to recognise other credit agreements. What about the standard 30 days upon receipt type agreement, used in business?? Or the pay back over X years for expensive end customer items.

Are all us businesses supposed to demand cash up front? No credit extended at all? Business to business or business to consumer.

How do new cars get sold for example? Sure they build in allowed losses into the credit agreement, but to make it easy to default is wrong. All the people who play by the rules end up picking up the tab in increased charges.

I don't see the changes as unfair. If you can't afford it then don't buy it, and behave responsibly and stop expecting everyone else to bail you out. Simple.

[Injin]

Mortgages are one thing. You fail to recognise other credit agreements. What about the standard 30 days upon receipt type agreement, used in business?? Or the pay back over X years for expensive end customer items.

What about them?

Shit happens, this is known. Bankrupcies happen, this is known.

Are all us businesses supposed to demand cash up front? No credit extended at all? Business to business or business to consumer.

Looks a good idea to me.

How do new cars get sold for example? Sure they build in allowed losses into the credit agreement, but to make it easy to default is wrong. All the people who play by the rules end up picking up the tab in increased charges.

Unless they save up instead. You don't have to buy on tick, that people default if you extend credit is a known.

I don't see the changes as unfair. If you can't afford it then don't buy it, and behave responsibly and stop expecting everyone else to bail you out. Simple.

No one is bailing anyone out here. Some people aren't getting paid all they thought they were going to be - by the personwho owes them. There are no wealth transfers.

The businesses and banks concerned voluntarily chose to extend credit to those people. if they suck at character judgement, the last thing they need is bailing ou tby sterner legislation - they need market discipline and that means going bankrupt themselves.

Again, all this is ignoring the banking paradigm, where by rights all debts should be cancelled right now, all "savers" told they are actually potless and the bankers stuck in prison forevermore and only focusing on genuine private lending.

Another issue i'd raise is that changing the rules of these contracts retroactively is a piss poor idea, it makes everyone cynical and therefore more likely to not play by the rules.

[SarahBell]

Take a look on the MSE bankrupt forums , sky package is not allowed even internet access is not allowed unless you can prove that you need it for your work.

Up until a year ago it was!

There's a spreadsheet with permitted allowances on somewhere tha includes all sorts.

[billybong]

It's just a shame that they didn't have these new more onerous rules when they were loading people up/people were loading up with debt. Then people just might have thought twice about taking on the debt. Or give fair warning.

Exponentially increasing private debt levels based on one set of bankruptcy rules and then, when loaded up, changing the rules to more onerous afterwards doesn't really seem to be much of a level playing field - what ever the rights and wrongs of debt.

In fact to those affected it might even look like a trap was being set all along.

Edited March 19, 2011 by billybong