Bankruptcy And PPI claims

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Over the last few years, millions of people have been able to claim compensation for mis-sold Payment Protection Insurance (PPI). The Daily Telegraph reports that the banks have set aside around £12 billion to settle these claims.

But, what happens to your PPI claim if you have been made bankrupt? Is it exempt from your estate under the ‘windfall’ rules, or do you have to pay any compensation to your creditors? Our guide explains.

• The ‘windfall’ rules

Under normal circumstances, once your bankruptcy comes to an end and you are discharged, any windfall you then receive is yours to keep. This may include an inheritance payment or a lottery win. They are considered ‘new assets’ as they did not exist at the time you became bankrupt.

It is easy to make the assumption that any compensation from a PPI mis-selling claim may also fall under the ‘windfall’ rules. If you’ve been discharged from your bankruptcy you may think that your PPI compensation is a ‘new asset’. However, this is not the case as we see next.

• Why your PPI claim may not be owned by you if you’re bankrupt..

Following provisions of the Insolvency Act (1986), the Insolvency Service takes the view that if a PPI policy was mis-sold before the date of your bankruptcy, any claim relating to the alleged mis-selling of the policy is owned by the Official Receiver or trustee of the bankruptcy estate. The claim is not owned by you.

Even if you have been discharged from bankruptcy, your position is not altered. This is because the ‘right of action’ pre-dates your bankruptcy. The claim is considered an ‘unrealised asset’ and as such your bankruptcy discharge does not transfer this claim back to you.

Specialist bankruptcy lawyer Frances Coulson told the Guardian: “The right to compensation for the mis-selling [of PPI] is a cause of action that vests in the bankruptcy estate when it arises.

“I appreciate that it is a disappointment to a victim of mis-selling but a trustee is under a duty to recover what he/she can for the creditors under the law and the law is something the trustee has to abide by.”

If your PPI claim is less than your bankruptcy debts: Even if you have been discharged the proceeds from the claim will go straight to the trustee in bankruptcy. Consequently, it is not worth your time making a claim.

If your PPI claim is more than you owe: You should proceed with a claim. For example, if your bankruptcy debts are £8,000 and your PPI compensation is £12,000 you can repay your debts and keep the remainder for yourself.

• If you were mis-sold PPI after you become bankrupt..

If you were mis-sold PPI after you declared bankruptcy, you should definitely make a claim. This is because only PPI on accounts held prior to the date your bankruptcy was declared can be taken by the bankruptcy trustee. Even if you still had balances owing from bankruptcy accounts, the PPI claim money should be yours to keep.

If you are or have been bankrupt, it is worth speaking to your trustee in bankruptcy or the Official Receiver before pursuing a PPI mis-selling claim.