After the Bankruptcy Order: Income, Restrictions and the Home

Most advice on an HMRC bankruptcy stops at the order. In practice the order is the start. An income payments order runs for three years, a restrictions order for up to fifteen, and the family home stays vested in the trustee, all of them surviving discharge at twelve months.

What Happens After the Bankruptcy Order

Most advice about bankruptcy on an HMRC petition stops at the order. In practice the order is the beginning. Three mechanisms then determine what the bankruptcy actually costs the individual, and all three run on their own timetables:

• Income payments orders and agreements: a claim on the bankrupt’s income for up to three years.
• Bankruptcy restrictions orders and undertakings: extending the disabilities of bankruptcy for up to fifteen years.
• The family home and after-acquired property: what the trustee can take, and the three-year rule that limits it.

Income Payments Orders and Agreements

The trustee or Official Receiver may seek a contribution from the bankrupt’s income. This can be by agreement (an income payments agreement, which is binding and enforceable as if it were an order), or by application to the court for an income payments order.

The statutory limits

• The court cannot leave the bankrupt without enough to meet the reasonable domestic needs of the bankrupt and their family. That is the statutory constraint, and it is the whole of the argument.
• The order can last up to three years from the date it is made, which means it will normally continue well beyond discharge.
• The application must be made before discharge, although the order itself can extend beyond it.
• Pensions in payment can be caught as income; an undrawn pension generally cannot be compelled into payment.

What the argument is actually about

“Reasonable domestic needs” is where these cases are won. The Official Receiver works from standard expenditure guidelines. Departures from them have to be justified with evidence:

• housing costs, and why a cheaper option is not available;
• childcare, and the income it enables;
• disability, health and care costs;
• travel required for work;
• the needs of dependants, including adult dependants;
• irregular or commission-based income, and the risk of it falling.

Where income is variable, the level should be set by reference to a realistic average rather than a good month, and provision made for review.

Bankruptcy Restrictions Orders and Undertakings

A bankruptcy restrictions order or undertaking extends the disabilities of bankruptcy for between two and fifteen years, depending on the seriousness of the conduct. It is a separate process from the bankruptcy itself, and it survives discharge.

What triggers one in an HMRC case

• Failing to keep or produce records.
• Trading while knowing the tax could not be paid.
• Using tax money, PAYE and VAT in particular, as working capital.
• Failing to submit returns or to cooperate with the Official Receiver.
• Preferences and transactions at an undervalue in the run-up, which are also separately attackable: see antecedent transactions.
• Incurring liabilities with no reasonable expectation of paying them.

The consequences

• Continued disqualification from acting as a company director without leave.
• Restrictions on obtaining credit without disclosure.
• Restrictions on trading under a different name.
• Entry on the public register for the duration.
• Consequences for regulated roles and professional memberships.

The Family Home and the Three-Year Rule

The bankrupt’s interest in the family home vests in the trustee. But the trustee cannot simply sit on it indefinitely.

Section 283A

Under s283A of the Insolvency Act 1986, if the trustee has not taken specified steps within three years of the bankruptcy order (realising the interest, obtaining a charging order, applying for an order for sale or possession, or entering an agreement about it) the interest revests in the bankrupt.

This is a genuine and valuable protection, and it is the reason trustees move on the home when they do. Where there is little or no equity, the trustee may take a charging order to preserve the position, or may agree to release the interest for a modest payment from a family member.

Applications for sale

Where the trustee applies for an order for sale, the court considers the interests of the creditors and the conduct and needs of the family. After the first year from vesting, the interests of the creditors outweigh all other considerations unless the circumstances are exceptional.

“Exceptional circumstances” is a demanding test. Ordinary hardship (children having to move school, the disruption of losing a home) is the normal consequence of bankruptcy and is not exceptional. Serious illness or disability of an occupant, where the property has been adapted or the move would be seriously detrimental, is the kind of circumstance that has succeeded.

After-acquired property

Property acquired by the bankrupt during the bankruptcy can be claimed by the trustee by notice. Income is dealt with through the income payments regime instead. An inheritance received during the bankruptcy is the classic case, and the obligation to notify the trustee is the bankrupt’s.

The HMRC Dimension

• The tax debt survives unless discharged. Discharge releases most bankruptcy debts, but the position on tax liabilities arising after the order, and on any liabilities excluded from discharge, needs checking.
• Post-bankruptcy compliance still matters. Returns must still be filed, and a fresh default produces fresh liabilities that are not caught by the bankruptcy.
• Annulment is a different route entirely. Where the objective is to remove the bankruptcy rather than to survive it, see our guide to annulment on an HMRC tax debt, and note that an annulment under s282 leaves the debts intact.
• The underlying assessment. If the tax was never properly due, that has to be resolved in the tax tribunal. The insolvency court will not go behind a final assessment.

Practitioner Checklist

1. Diarise three years from the order for the s283A revesting of the home, and monitor what the trustee does.
2. Prepare the income and expenditure case properly before the income payments discussion, with evidence for every departure from the standard guidelines.
3. Treat a BRO or BRU as a separate matter requiring its own advice, and never as a formality.
4. Advise on the notification obligations for after-acquired property, which are the bankrupt’s and are frequently overlooked.
5. Keep post-bankruptcy tax compliance current.
6. Consider whether annulment is the better objective, particularly where the client holds directorships or a regulated position.

Frequently Asked Questions