Worried about going bankrupt? – now do it online!

A lot of people are worried about going bankrupt, often for the wrong reasons – the law and experience of bankruptcy aren’t what they used to be; they’re worried about the stigma; they are worried about appearing in fron of a judge.

Really, as long as people filled out their debtor’s petition abouit right – don’t you just hate that word ‘debtor’? – I know I do – they never appeared in front of the court, it was a closed door exercise while they sat in the waiting room – yet it will still probably be a long time before people realise it’s nowhere near as bad as you might think, as those who have gone through it recently are, in comparable terms, few and far between.  But finally there’s some movement on the court side…

Over recent years all aspects of government have been moving lock stock and barrel online in an effort to save costs and improve efficiency. Finally, after much talking, people with big financial problems are able to petition for their own bankruptcy online, there’s no need to go to court, thus one of the major obstacles that put off people doing what they really need to be doing has been removed.

Will we see more people going bankrupt now that they can sit at a computer and press a few buttons?  I suspect so, but not in great numbers because the stigma of bankruptcy aka ‘failure’ remains – it’s a British thing, tell any American how you feel and they will just laugh at you.

If you need to make yourself bankrupt, just go to https://www.gov.uk/apply-for-bankruptcy 

As you will see, it’s a https ie should be a safe address

If you’ve been putting it off and really ought to do it but have been worried abouit facing up to people, just do it!

 

Paul Brindley

Will I lose my pension if I go bankrupt?

Governments throughout the Western World want us all to save for our old age so we’re less of a burden on the state.  That’s why we get tax relief on payments into our pension funds, it’s not out of the goodness of their hearts.

But there always has been confusion where different aspects of the law cross over with insolvency law, and one such area is that of pensions.  Up to May 2000, if you went bankrupt, the trustee could get his hands on some of your pension – you see while insolvency law talks about assets that are excluded from a bankruptcy – and thus which you could keep if you did go bankrupt – pensions were not firmly on the list of ‘excluded assets’.  This meant that people were losing money they’d put into a pension many years before they started having financial problems, and because the Trustee could get his hands on the pension money, the bankrupt was becoming more of a burden on the state.  People were also asking themselves why they should bother putting money into a pension pot when they most needed it only to find it taken away from them later on, often for reasons outside of their control.  Also, surely when looking after people in their old age is one of the biggest problems this country faces, surely the law didn’t sit happily with common sense or greater public policy?

The government realised this wasn’t working, so for people going bankrupt from May 2000, they changed the law, so that after that date you could generally keep your pension if you went bankrupt.

All was fine for a while….it was a bit like an uneasy truce, things didn’t seem quite right… trustees in bankruptcy still had a duty to maximise realisations for the creditors but couldn’t get their hands on what could be the bankrupt’s biggest asset.

Under the wording of the insolvency law (it goes back to 1986!), any income you actually receive – or become entitled to – from any source, including your pension, is subject to any income payments agreement or income payments order that might be in place – this is a 3 year agreement whereby you pay your surplus income into the bankruptcy.  I can understand that, but you would have thought that at least your ‘capital’ is safe… at least it was thought to be…

In 2012 a case passed through in the High Court – Raithatha v Williamson – in that case the judge decided that an income payments order could be made where the bankrupt had the right to elect to take a drawdown pension even if he hadn’t yet done so.   The trustee could even force the bankrupt to draw down a capital sum and give it him if it meant he had income above his reasonable domestic needs (which would almost always be the case given the size of the drawdown).  This drove a coach and horses through the general principle of ‘trustee cannot touch’ for people who were nearing retirement age – even as early as 55.  So now a trustee could essentially force a bankrupt near 55 to take a drawdown, whether they wanted to or not, grabbing money previously thought to be safe and imposing an increased burden on the state down the line!  For some bankrupts we were essentially back to something like the old rules which the government tried to change because they didn’t like them!

Then in December 2014, a judge in another High Court – this time in the case Horton v Henry – came to the opposite decision!  In that case the judge decided the trustee in bankruptcy could not get an income payments order over a personal pension that is not yet in payment as there was no ‘legal entitlement’ on which the order could bite.  So now we have two conflicting High Court decisions!  Until the Court of Appeal decides one way or another, we’re stymied!  What do advisers tell people in their 50s, 60s or 70s, who are contemplating bankcuptcy?

But it applies only to people in their 50s, 60s or 70s, right, and only for small sums of money, right?

Well yes and no, you see in April 2015 the pensions laws in the UK change, enabling people over 55 to drawdown all their pension from their pot.

What this means is that anyone 52 years or older (allowing 3 years for an IPO/IPA) should, if at all possible, defer making any decisions to go bankrupt or not until the appeal is heard and decision made, or the government bring in some emergency legislation.  It might be that you will have to use other options such as a Debt Management Plan or Token Payments to buy that time.

Will I lose my pension if I go bankrupt?

Governments throughout the Western World want us all to save for our old age so we’re less of a burden on the state.  That’s why we get tax relief on payments into our pension funds, it’s not out of the goodness of their hearts.

But there always has been confusion where different aspects of the law cross over with insolvency law, and one such area is that of pensions.  Up to May 2000, if you went bankrupt, the trustee could get his hands on some of your pension – you see while insolvency law talks about assets that are excluded from a bankruptcy – and thus which you could keep if you did go bankrupt – pensions were not firmly on the list of ‘excluded assets’.  This meant that people were losing money they’d put into a pension many years before they started having financial problems, and because the Trustee could get his hands on the pension money, the bankrupt was becoming more of a burden on the state.  People were also asking themselves why they should bother putting money into a pension pot when they most needed it only to find it taken away from them later on, often for reasons outside of their control.  Also, surely when looking after people in their old age is one of the biggest problems this country faces, surely the law didn’t sit happily with common sense or greater public policy?

The government realised this wasn’t working, so for people going bankrupt from May 2000, they changed the law, so that after that date you could generally keep your pension if you went bankrupt.

All was fine for a while….it was a bit like an uneasy truce, things didn’t seem quite right… trustees in bankruptcy still had a duty to maximise realisations for the creditors but couldn’t get their hands on what could be the bankrupt’s biggest asset.

Under the wording of the insolvency law (it goes back to 1986!), any income you actually receive – or become entitled to – from any source, including your pension, is subject to any income payments agreement or income payments order that might be in place – this is a 3 year agreement whereby you pay your surplus income into the bankruptcy.  I can understand that, but you would have thought that at least your ‘capital’ is safe… at least it was thought to be…

In 2012 a case passed through in the High Court – Raithatha v Williamson – in that case the judge decided that an income payments order could be made where the bankrupt had the right to elect to take a drawdown pension even if he hadn’t yet done so.   The trustee could even force the bankrupt to draw down a capital sum and give it him if it meant he had income above his reasonable domestic needs (which would almost always be the case given the size of the drawdown).  This drove a coach and horses through the general principle of ‘trustee cannot touch’ for people who were nearing retirement age – even as early as 55.  So now a trustee could essentially force a bankrupt near 55 to take a drawdown, whether they wanted to or not, grabbing money previously thought to be safe and imposing an increased burden on the state down the line!  For some bankrupts we were essentially back to something like the old rules which the government tried to change because they didn’t like them!

Then in December 2014, a judge in another High Court – this time in the case Horton v Henry – came to the opposite decision!  In that case the judge decided the trustee in bankruptcy could not get an income payments order over a personal pension that is not yet in payment as there was no ‘legal entitlement’ on which the order could bite.  So now we have two conflicting High Court decisions!  Until the Court of Appeal decides one way or another, we’re stymied!  What do advisers tell people in their 50s, 60s or 70s, who are contemplating bankcuptcy?

But it applies only to people in their 50s, 60s or 70s, right, and only for small sums of money, right?

Well yes and no, you see in April 2015 the pensions laws in the UK change, enabling people over 55 to drawdown all their pension from their pot.

What this means is that anyone 52 years or older (allowing 3 years for an IPO/IPA) should, if at all possible, defer making any decisions to go bankrupt or not until the appeal is heard and decision made, or the government bring in some emergency legislation.  It might be that you will have to use other options such as a Debt Management Plan or Token Payments to buy that time.

Led down the garden path…

This is the third article in my rant over the bad – in fact downright dangerous – advice my fellow insolvency practitioners are regularly giving out…

The first was about the bad advice being given to company owners, selling them a liquidation they didn’t want, need nor could easily pay for…

The second was about the failure to advise individuals that income based individual voluntary arrangements are a massive gamble…

This, my third, rant is again about the bad advice given to individuals, but on a more general level.

Let me explain…

Have you seen how debt advisers of all sorts, but particularly the IVA specialists, send husbands and wives, or couples, down the same debt solution at exactly the same time?  They argue that it makes perfect sense, that doing so is cost effective… yet that, at least for me, is manure, and I’m going to show you why…

First of all, a few key principles for you to take on board…

You, me, your kids, your parents, Uncle Tom Cobleigh and all are separate individuals in the eyes of the law.  We’re each our own entirely distinct legal entity.  It matters not that we are married, part of a family, related in any way – we are all our own separate legal being, with our own little package of assets and liabilities, and thus our own individual options for dealing with our financial problems. 

And, importantly, those options are often not mutually exclusive.   An option taken now doesn’t always stop another being taken later on.

Sure, there are a few complications when their are joint assets or joint debts, but the principle remains – we each have our own separate options, which we can take as and when we choose.

Let’s take a typical situation…. Husband (Basil) and wife (Sybil); Basil is a landscape gardener who chooses to run his little business through a limited company, in which he owns all the shares.  His normal work is maintaining your and my garden, doing a little building work from time to time, pathways, rockeries, decking, BBQs, that sort of thing.  A nice little business, but not enough to keep house and home, the family has to rely on his wife’s income too, especially as he had an accident a year or so ago – he twisted his back beating up his Morris 1100 and couldn’t work for 6 months.  Couple this with a foray into the buy to let market where a void period and some unexpected repairs as a result of the actions of a dodgy tenant and supporting one of his kids through university saw his debts built up.  He now has £50,000 in personal credit card and loan bills, each at their max, he’s now not even paying the minimum payments – the business isn’t doing as well as he’d hope as people aren’t spending like they used to on their gardens, and his bad back plays up from time to time, middle age is taking its toll.  There’s nothing but a few items of small plant and an inexpensive van in the company: it”ll generate £1,500 per month on a good month, more often than not a lot less, particularly in the winter months.  The buy to let is in negative equity – they’d taken out the maximum mortgage they could when they bought it, and have remortgaged a few times, using the money raised to buy Basil’s van and tools.  The buy to let is making a profit of £120 per month, after paying the mortgage, assuming everything goes hunky dory….

Feisty Sybil is a part time shop assistant and home maker.  When the debts started piling up she took on a few debts too – but at a far lower level, after all, she earns a lot less than Basil.  She’s got £20,000 of credit card debt, of which £15,000 is in her own name, £5,000 is a joint debt with Basil.

The family, Basil, Sybil and their three kids – Martha, 20, going through Wolverhampton Uni; Steve 16 and at Bilston Academy; and Sarah, 13 at Coseley School – all live in a cramped three bed semi on the Coseley/Bilston border.  A few years back, with the walls moving in, Basil, a dab hand at building, started on an extension above the garage.  But then he hurt his back, he couldn’t work and now he hasn’t got the money to finish it and doesn’t know when he will ever have.  The house is virtually unsaleable in its present condition, at best a buyer would pay a knock down price, leaving nothing in the kitty to set up home elsewhere after settling the mortgage.  Basil is hoping Sybil’s mother, Ethel, will leave them something in her will, but they’d be lucky to get £45,000 when she turns her toes up.  And that’s assuming it doesn’t all go in care home fees.  He/they have been holding on for that legacy – it might just provide the lifeline they so desperately need – but cantakerous old Ethel, whos’ yoyo’ed in and out of hospital over the last 18 months, seems to have 9 lives.

So you’ve got the picture – The Fawltys are a hard working, average, working class family who are trying to work their way through life, but have been hurt by a few things that all came together to put them into quite a difficult position.

So they go to see an insolvency practitioner.

This ‘expert’ recommends an IVA – a ‘joint IVA’ – the great thing is they’ll be able to substitute the need to pay the minimum payments on their debts with ‘one affordable payment’ of just £400 per month into the IVA – it will mean paying less and bring some certainty to the situation, they’ll be able to slep at night.  They’ll even keep their home; Basil will still be able to act as a director of his little limited company; they could keep the buy to let; and in 5 years time, they’ll be debt free – what they’ve not paid to their £65k of unsecured debt will simply be written off.  What’s more, them both going into an IVA right now would not only keep the IVA experts’ costs down, it would make things far simpler for them as they’d both come out of it at the same time, ten years before retirement.

Sounds reasonable?  Sure it does… but as I said, it’s appalling advice.

Let me tell you what taking that advice would lead to…Ethel’s legacy going into the IVA to pay the insolvency practitioner’s fees and Basil and Sybil’s creditors – that’s to say, the Fawlty family would see nothing of it; Basil and Sybil still having to pay £400 per month into the IVA for 5 years – these monies also going to the creditors to pay off the ‘capital sum’ and interest (with interest being charged at 20% to 30% pa); the IP getting about £20k in fees in total; etc… there are other implications too.  All in all a poor deal for the family.

So let’s pull the advice to bits…

The following is a key principle – please remember it…  ‘Just because one solution might be the best option right now for one person, doesn’t mean to say the other has to follow the same course at this exact point in time, even if ultimately it might be the best option for them too.’

Here’s another – both Basil and Sybil have their own full tool box of options each – these include (i) Best manage their cash, keeping themselves out of any formal insolvency; (ii) Keeping creditors at bay using the ‘token/no payment’ option; (iii) Debt Management Plan; (iv) IVA; and (v) Bankruptcy.

It’s vital they should assess their own individual options first, asking themselves ‘What’s the best for me at this particular point in time?’.  Then when they know what that option is, assess what that means for the other member of the couple.

So the steps are:

1)  What’s the best option for me?  Write down the pros and the cons for me.

2) If I take that option, what impact does that have on my partner?  Write down the pros and the cons for them.

3)  Are we prepared to live with the cons?  Could those cons be reduced, if not eliminated, by something either I or my partner could do?  If I’m not happy with the cons, and neither I nor my partner could reduce them, what’s my second best option and what are its pros and cons – the cons on both me and my partner?

4) Repeat steps 1) to 3) for your partner, assessing the pros and cons on both them and you.

5)  Put together a plan that you’re both ‘happy’ with.  Ask yourself, whether overall, this plan works and fits with what you both want to achieve.

6) Run with it…

Here’s what I would have advised in Basil and Sybil’s case…as you’ll see it’s a country mile away from what the other IP advised…

Basil should go into bankruptcy soon, and first – cost of doing so £700, debts written off £50,000 – it would be like picking a 70 to 1 certain  winner at Epsom, a great return on his money; he’d come out of bankruptcy in 12 months time. Sybil should keep her creditors at bay for that 12 months, using the token payment option; before Basil goes bankrupt, Sybil should become the shareholder and director of the company, taking responsibility for running it, with Basil becoming a mere paid employee – for just 12 months.  Then when he’s out of bankruptcty the roles would reverse – she’d go bankrupt, but before she did so, he’d take buy back her shares in the company and get appointed as its director.  Cost to her, £700, debts written off £20,000. Get Ethel to change her will, so the beneficiaries are Martha, Steve and Sarah, missing out the Basil/Sybil generation (she could always change it back in 24 months time if she’s still around!) – that way the legacy would not fall into the bankruptcy as ‘after acquired property’, it could be used to pay down the mortgage on their home or the BTL giving them a far better chance of a prosperous retirement.

An alternative to think about in 12 months time would be, if Ethel dies in the meantime and leaves her £45k to the kids, for some of that to be used, say 40%, £8k, to offer to her creditors in full and final settlement, if she really wanted to avoid bankruptcy.  The point is, she doesn’t necessarily have to follow Basil’s route – having ringfenced the legacy, she could take another solution then.  Watch, wait and see!

Result if plan A, of them both going bankrupt, him first, her later: No disruption to the business; total process 24 months when one or the other was in bankruptcy compared to 5+ years in an IVA; no assets lost – not even the home or BTL (unless they actually wanted to lose the BTL – they have the choice);  legacy kept within the family, doing it, rather than the creditors some good; no IP fees, whole process cost £1,400 (plus the cost of my advice), a little inconvenience and form filling, and the cost of writing one/two wills, compared to an IVA which would see over £69,000 spent, I’d argue wasted.

The Fawltys’ name may be made up but the facts are real,but in recent weeks I’ve seen 2 families, both where they’d been led down the garden path by so called experts with plausible yet downright dangerous advice, costing them money they couldn’t really afford.  You see, they suffered the outcome I ‘anticipated’ above, they will probably now never manage to rebuild their lives.

And that is inexcusable.  The IPs took them to the cleaners, their entire family, not just the ones in debt, but them all.

You see nothing will ever be a substitute for experience, professionalism and a single minded focus on getting the best outcome for the client … and with almost 30 years in the insolvency game, you can be sure anyone who comes to me for support will be getting these in abundance.  They will not be sailing into unchartered territory, they’ll get advice and support that will stand the test of time.

If you’re accustomed to using another insolvency practitioner and the story I’ve painted above is ringing true for you, I’ve a question for you…why?

BEWARE! – What you’re not being told could be more important than what you’ve been told (2)

This is the second in what is likely to be a series of articles over the poor advice that my fellow insolvency practitioners are giving out.

In my last article – click here to read it – I talked about how owners of small companies that had no, or very few assets, were being talked into paying for liquidations they neither needed nor were obliged to carry out.  Today, I’m going to be talking about personal insolvencies, specifically a process called an ‘individual voluntary arrangement’ or IVA.

Take a look on the web and you’ll see numerous references to how easy IVAs are to both get into and live through; how they’re great because they’ll write off most of your unsecured debts; how you’ll protect your home; how they will leave you with money in your pocket every month; how they are somehow better and softer than bankruptcy.  It all sounds too good to be true…

And it often is.

You see, what they don’t tell you is that one third of all IVAs fail.  This is not anecdotal evidence, it’s hard evidence gathered by the government – click here to see the figures.  Look at figure 2.

OK, so one third of IVAs fail. Big deal, that’s not so bad, is it?

Well yes, it is.  You see not all IVAs are the same – some are income based, some are ‘one-off’ settlements.  Under a ‘one-off’ settlement type of IVA, money from an inheritance, windfall, gift from family or friends, or the sale of assets is paid into the IVA in a lump and then paid out to the unsecured creditors in full and final settlement of their debts.  The point is this money is certain – it’s probably already sitting there in a solicitor’s or the Insolvency Practitioner’s bank account held on trust pending the creditors’ agreement to the IVA – the success of the IVA is assured.  So if we knock out of the equation the one-off settlement IVAs, the true failure rate for income based IVAs must be higher than a third… let’s be conservative and say it’s 40%-45%.

Do you hear IPs telling people coming to them looking for an income based IVA that the process they are about to go into is about as likely to fail as it is to succeed?  No, I don’t.  Do they warn people of the impact on them of the IVA failing?  If you’re lucky, it’s skated over, after all it’s never going to happen is it? – you have every intention of fulfilling your part of the bargain.

So now we know the IVA has about 50-50 chance of failing as succeeding, but what is the impact of it doing so?

Let’s go back to some basics.  Back in 1986, IVAs were invented as a softer alternative to bankruptcy for sole traders, i.e. business owners.  They weren’t invented to deal with what they have turned out to be used mainly for – hundreds of thousands of consumers who have unsecured credit card and loan debts they could never pay.  So with something like 50,000 a year IVAs being put in place, rather than the handful expected, the insolvency governing bodies got together with the banks and agreed a standard form of IVA for such consumer debtors.

It’s called the ‘IVA Protocol’ – here’s a link to the government’s website linking to its various versions over time – and in a number of ways every version of it is truly horrible.  It’s clear the banks had the whip hand in the negotiations as it’s very much written in the banks’ favour.

So what does it say about failure?  Well, if you miss just 3 income contributions into the IVA over the 5 year period of the IVA – 5 years is the standard duration – the Insolvency Practitioner can petition for your bankruptcy.  It’s at his discretion, you cannot stop him. With many IVAs failing in years 2,3, even 4 or 5 of the IVA, all you’ve done while you’ve been paying into the IVA is throw good money after bad.  And what’s worse, the longer you stay in the IVA, the bigger a chance you’re giving a trustee in bankruptcy of taking your home off you! (house prices tend to go up, your mortgage will have either stayed the same or gone down, so after a time you’ve probably got equity you didn’t have previously that the trustee can get his hands on).

I have a good number of other issues with the IVA Protocol, but what really concerns me is that not once have I ever had someone who’s subject to one of these things come to me ever fully understand what they had got themselves into.  They simply got sold a story that it was the panacea to all their financial woes.  Not once has any Insolvency Practitioner fully explain the ‘what ifs’ satisfactorily so the person fully understood everything they needed to know before taking the plunge.  And that’s inexcusable.

I recognise that no one has a crystal ball that tells them what’s going to happen over the 5 year period of an IVA covered by the IVA Protocol … that people tend to be optimistic as to the future and hate taking a pessimistic view of what might happen … that people who are desperate will cling to any lifeline… but there is never any excuse from any insolvency practitioner for not being entirely honest with the facts and open as to the implications of a 50-50 gamble going the wrong way.  And that’s why I have a problem with my fellow IP’s advice.