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What are the Income Payment Agreement rules?

Posted 10 January 2017

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Will you have to pay towards your debts if you go bankrupt? What are the rules surrounding this? Here are the answers.

If you’ve been told that you need to pay towards your debts during bankruptcy, or you think you might need to go bankrupt, it’s important to know how everything works. In this blog, we’re going to explain exactly how the Income Payment Agreement rules work for people going through bankruptcy.

What is an Income Payment Agreement?

An Income Payment Agreement (IPA) is the payment plan some people have to start if they go bankrupt. We say some people because not everyone who goes bankrupt can afford to put anything towards their debts each month at all.

Your Trustee will take a close look at your financial situation before deciding whether you have to have one or not. IPA payments are usually paid monthly though depending on your income, you could pay them differently. They go towards the debts included on the bankruptcy as well as the fees and costs of your bankruptcy. If your income is made up solely of state benefits, your definitely won’t have to pay anything towards your debts on the bankruptcy.

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What are the rules surrounding these payments?

If your Trustee has said that you are going to have an IPA, then you have to pay this – it’s a legally binding agreement between you and your Trustee.
Not paying your IPA can have serious, negative consequences. In these circumstances the Official Receiver can apply for an Income Payment Order (IPO). This is a court order and can mean that the money you should be paying towards your IPA can be taken directly from your bank account or wages, or that your discharge from bankruptcy is suspended.

Your IPA will normally last longer than the bankruptcy itself. Bankruptcy usually lasts for one year, whereas your IPA payments normally last for three.
The rule is: if you have more than £20 a month leftover after your essential living costs have been paid, then this will need to be paid towards your debts. We’ll explain more about how your essential living costs are worked out next.

How are the payments worked out?

Your IPA payments will always be worked out according to what you can afford – there isn’t a set figure you have to pay. Your Trustee will look at your budget and see whether you can afford these payments as well as your other essential living costs.

You will always be left enough money to pay your rent/mortgage, other secured debts, household bills and essential transport and, of course, food. The Trustee will have guidelines as to how much they expect you to be spending on the different areas of your life. There is some flexibility in this however, for instance, if you have to travel a long way to work each day, then your travel costs may be higher than what is normally expected.

Once all these essential costs have been taken into account, any money left over (known as your disposable income) will be put towards your debts on the bankruptcy. It’s also possible that there will be some items that the Official Receiver may not think are absolutely necessary. For example, if you smoke, you might not be allowed a smoking allowance or an amount for entertainment.

What if I can’t afford my IPA?

It’s important to remember that your IPA should always be affordable. Over the three years that your IPA is in force for, your income may fall or your outgoings may rise, meaning you can’t afford your original payments any more.

In this case, get in contact with your Trustee and explain the situation – you may also need to provide evidence for the change in your circumstances. Your Trustee will review your budget again and they have the power to reduce it to an affordable level.

Is bankruptcy the only way to deal with my debts?

Bankruptcy is not the only way to deal with your debts. There are other debt solutions available that you should look into before you apply for bankrupt.
For example, a Debt Relief Order may be more appropriate if you have no disposable income and few assets. This debt solution suspend your payments towards your debts for twelve months and, if your circumstances have not improved during this time, your unsecured debts are completely written off. As this solution is designed for those who are struggling the most with their debts, there are some specific rules about who is allowed to have a Debt Relief Order.

Get expert advice

Having debt that you can’t realistically pay back can be very stressful. Before you go ahead and apply for bankruptcy, you should get expert advice, to make sure it’s the most appropriate way out of debt for you. This advice is free of charge and confidential from a number of debt charities as well as from our own expert advisors. Just scroll down and you’ll see the options you have to contact them today.

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.