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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.

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What belongings are taken when you go bankrupt? In short, from the date that the courts grant a bankruptcy order, all of your bank accounts, building society accounts and all moneys therein, pass to the control of the Official Receiver (they are “vested” in them), likewise your “assets”. As a whole, this is what is termed your “Bankruptcy Estate.”

The Official Receiver (or “Trustee”) will then try to use your Bankruptcy Estate to pay debts off on your behalf. Any costs of the bankruptcy, such as administration fees, are also taken from this estate.

So, then, what items get taken– or, in other words, what are deemed as your “assets”?

• YOUR CAR:

The exception to this would be if the vehicle(s) in question was needed for use personally – such as in cases of disability, say – or for use in your employment, your business, or your vocation.

• HOUSE:

This is a slightly more complicated affair. However, if you are the sole owner of your home then the Official Receiver will have the legal title and beneficial interest automatically passed over and placed into the Bankruptcy Estate.

If you have joint ownership of your home, or if your spouse/civil partner or children are living with you, then the sale of your property, by the Official Receiver, may be delayed until after the first year of bankruptcy. Instead, the courts could still order you to sell-off your home. The Official Receiver would then inherit your beneficial interest.

During any period that the Official Receiver/trustee may not sell your home, they can apply for a “Charging Order” on your interest in the property (only if that amount is worth £1,000 or greater). This means if you were then to sell your property, you must pay that amount to the Official Receiver, out of the revenue raised.

Additionally, until your interest in your house is sold, or the Official Receiver obtains a charging order over it, the interest is, technically, kept under the control of the Official Receiver. However, this is usually only for a period of three years and after that time the interest normally returns to you. But, should you be discharged from bankruptcy during that three-year period, the benefit of any increase in value of your interest would still revert back to the Official Receiver.

• LUXURY ITEMS:

Any other properties, shares or non-essentials, such as antiques.

In addition to the above assets being taken from your possession and placed into the Bankruptcy Estate, all of your accounts will also be frozen. This means all credit cards, chequebooks, and bank-cards will be taken.

However, the Official Receiver can release certain monies in order for you to buy things if you need them urgently – things such as food. They can also release your spouse’s/civil partner’s share of any money held in a joint account.

So what can you keep? Well, ordinarily you will be permitted to keep any household items, like bedding, clothing or furniture as well as any items crucial to your job – tools, books or vehicles. But if anything could be replaced with a cheaper version, then you would have to give these over to the Bankruptcy Estate.

Going bankrupt doesn’t affect your entitlement to state benefits, but you the benefits to which you are entitled can impact you bankruptcy

Making payments to creditors.

One of the aims of bankruptcy is that your creditors should receive at least part payment of what they are owed. When you are made bankrupt, your assets are often sold and the money will be split between your creditors.

In addition, the Official Receiver or your trustee in bankruptcy will often ask you to agree to make contributions towards your bankruptcy debts, if you can afford to, for a period of time – normally 3 years. They do this on one of two ways:

An Income Payments Agreement (IPA) – This is a voluntary agreement where you make payments to your creditors from your ‘disposable income’ – surplus income you have left after paying your living expenses

An Income Payments Order (IPO) – This is a court order which compels you to make regular payments into the bankruptcy estate from your disposable income. If you don’t keep up the payments, the trustee can apply for a court order suspending your discharge from bankruptcy or take other legal action to recover unpaid amount

Whether you will be asked to enter into one of these agreements depends on your whether your income comes solely or partly from benefits, as we see next.

If your income is only from state benefits

If your income is only from state benefits, the Official Receiver will not ask for an IPA or IPO. ‘State benefits’ includes all forms of income supplement and support such as:

• Income support
• Job seeker’s allowance
• Disability living allowance
• Incapacity benefit
• Council tax benefit
• State retirement benefit
• Child benefit
• Tax credits

However, if your income comes from benefits and other sources, the situation is different. Keep reading to learn more.

• If your income comes from benefits and other sources..

If your income includes benefit payments and income from a PAYE, job, self-employed work or pensions you may have to pay money to your creditors under an IPA.

The Official Receiver will look at your total income (including benefits) and your allowable day-to-day living expenses to establish whether you have any disposable (spare) income.

If the Official Receiver asks you for payments under an IPA, the amount of any payment has to come entirely from any income that is not benefits. The Official Receiver includes your total income (including state benefits) in the calculation of disposable income, but only the money you earn from working would provide the payments under the IPA or IPO.

• Make sure you claim all the benefits that you are entitled to..

Going bankrupt doesn’t affect your entitlement to state benefits. However, debt charity Step Change recently reported that many families are losing out on as much as £4,000 per year by not claiming their full benefits entitlements. Research from the charity shows that, on average, families are failing to claim £80 per week in benefits. Unclaimed benefits total around £16 billion in the UK every year.

If you find yourself in debt then you may be able to help yourself by claiming benefits that you’re entitled to. These may include tax credits, housing benefit or pension credit. 

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An Income Payment Order (IPO) or Income Payment Agreement (IPA) can be issued when your payments to creditors have been reduced following a bankruptcy order.

In cases where the bankrupt has surplus income as a result of this, the trustee or official receiver will arrange for ongoing contributions to creditors to be made when you can afford. This process normally lasts three years from the date of the bankruptcy order, but this can differ from case to case.

With an IPA the official receiver or trustee is entitled to ask you for regular payments from surplus income, towards the bankruptcy estate, for a specific amount of time. This cannot leave you unable to meet everyday living costs, and is a voluntary agreement, but binding; non-compliance can result in court orders and suspension of discharge from bankruptcy.

In cases where no agreement can be settled on an IPA, an IPO is necessary. This is a court order obtained by the trustee, and can either require payments directly from you or your employer. Failure to meet the requirements therein will result in suspension of discharge and additional legal action.

An IPA or IPO cannot leave you incapable of covering domestic costs for you and any dependents including children and adults without an income. As every case is unique, the trustee or court will assess the reasonable needs of your household individually. These include:

• Household insurance
•  Car tax, breakdown coverage and insurance
•  Membership to professional bodies essential to your income
•  Medical costs including dental and optical
•  Mobile phone to a reasonable monthly tariff
•  Dry cleaning
•  TV licence and rental including videos

Reasonable expenses can differ, and the official receiver will take into account personal circumstances when making any judgement.

To prove your reasonable costs you will be asked for a statement of affairs detailing income and expenditure if you filed for bankruptcy, including pay slips, invoices and bills or your preliminary information questionnaire, PIQB, if someone else made you bankrupt.

Both should contain comprehensive information on rent, food, heating, lighting, clothing and other normal monthly outgoings. In most cases, any disposable income will be tied up in an IPA or IPO following bankruptcy.

Within income, all payments you receive from self and PAYE employment, salary, benefits including those for children, working tax credits, and pension payments will be included. If your income increases or you receive a lump sum then in both instances you must contact the trustee immediately. For wage increases a form may be required to detail the new salary and current spending, and any IPA or IPO may be amended as a result.

In the event of a lump sum, it’s likely you will be required to make a one off payment as a result, which will vary depending on what point you are up to in any arrangement, and whether you have been discharged from bankruptcy.

In most cases HMRC will apply a nil tax code, meaning your employer will be instructed not to take any more income tax from you. They will not be informed of the reason behind this, and this does not mean you are exempt from tax, this will be payable later. Surplus money resulting from this can form part of an IPA or IPO.

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Even if you have been made bankrupt, you may still need money to pay your everyday living expenses. You may have a family to support and household bills to pay. But, how much are you allowed on a monthly basis? What allowable living expenses am I entitled to in bankruptcy? And, what expenses are considered ‘reasonable’? We answer your questions.

The Statement of Affairs

When you are declared bankrupt you will need to complete a bankruptcy application form called a Statement of Affairs. This form asks you for information about your personal circumstances including how much you owe, what assets you have, your income and your living expenses.

Once you are declared bankrupt, it is the duty of the Official Receiver to make sure that you pay back as much as you can to your creditors. Part of the decision about what you repay is based on your ‘disposable income’ – the difference between your income and your living expenses.

So, it’s vitally important that you outline all your living expenses. If you do, you can be confident that you won’t be asked to pay more than you can afford to your creditors. However if you miss out important living expenses, you could leave yourself short of money.

We’ll look at what are considered ‘allowable’ living expenses next.

Allowable living expenses

Before you complete a Statement of Affairs or other bankruptcy forms, it is advisable to list your living expenses on a piece of paper. Once you have made sure that you have included all your expenses on the list, you can transfer the figures to the official form.

It’s worth remembering that there is no definitive list of bankruptcy living expenditure figures that the Official Receiver will accept. Each individual set of circumstances is different and a decision will be based on what you need to live on and on the Official Receiver’s understanding of your situation. The more information you can give them about the expenses you need the better.

Things that are likely to be allowed as reasonable domestic expenses include:

• Rent or mortgage payments
• Council Tax
• Your utility bills (electricity, water, gas, landline telephone)
• Food
• Toiletries and cleaning products
• Clothing and footwear
• Your TV licence
• Membership of a professional body that is vital for your job
• Childcare, a long as you and your partner/spouse work
• Buildings and contents insurance
• Your car insurance, road tax and breakdown cover (assuming you have been allowed to keep your car under the terms of your bankruptcy)
• Prescription, opticians and dental costs
• A mobile phone

Things that are unlikely to be considered allowable living expenses under bankruptcy include:

• Satellite TV subscription
• Money for alcohol, gambling or cigarettes (‘these should not be funded at the expense of creditors’)
• Private healthcare insurance
• Charitable payments
• Gym membership

Family holidays and pet food/vet bills will be considered individually although the guidelines say these are ‘not allowable unless [it is] to cover [a] reasonable domestic need’.

It is also worth bearing in mind that expenses budgets which are high based on your personal circumstances will be questioned by the Official Receiver. You should therefore be realistic with your figures.

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In short, yes. Even if a bankruptcy order has been made, the court retains the power to annul (cancel) such an order. If your bankruptcy order is annulled you are no longer bankrupt and it releases you from the restrictions placed on you by insolvency law.

You can even apply to have your bankruptcy order annulled after you have been discharged from bankruptcy.

Here, we look at when you can apply for an annulment and at the effects of having your bankruptcy order annulled.

• When can I apply for my bankruptcy to be annulled?

You can apply for an annulment at any time for one of three reasons:

1. The bankruptcy order should not have been made – for example if the proper procedures to obtain the order were not followed, or that the debt to the creditor issuing the petition had been paid in full prior to the bankruptcy order being made. For example, you may have moved home and had not received any notice of the bankruptcy hearing. Or, you may have been in hospital or abroad for an extended period and had no knowledge of the bankruptcy proceedings
2. Your debts have been paid to the satisfaction of the court – you may have to prove to the court that you have paid the debts, particularly if the debt was settled through a third party such as a solicitor
3. An Individual Voluntary Arrangement (IVA) has been arranged – if your creditors have agreed to an IVA you can then apply to the court to have your bankruptcy order annulled. A proposal for an IVA will normally provide that a bankruptcy order be annulled in these circumstances

• What happens on the annulment of my bankruptcy order?

Once your bankruptcy order is annulled, you will revert to your pre-bankruptcy status. While disposals of your property by the Official Receiver and the trustee will remain valid and will not be reversed, any other assets will be returned. However, you will remain liable for any other debts you have that were not repaid in the bankruptcy.

If your bankruptcy order is cancelled because the debts have been paid or a voluntary arrangement has been approved, the record of the order will be removed from the Insolvency Service’s Individual Insolvency Register two years after the date of cancellation. If your bankruptcy order has been annulled because it should never have been made, the record will be removed from the register immediately.

In addition, the court will ordinarily include provision for the cancellation of any registration of your bankruptcy petition at the Land Charges Department of HM Land Registry. You will normally have to write to the Land Registry to ensure this happens.

You may have to provide information to credit reference agencies in order that they can amend your record. This is because the Official Receiver does not send any form of notice to these agencies. The agencies pick up information from other sources such as advertisements of bankruptcies in newspapers and the Register of County Court Judgments. If no advertisement of the annulment of your bankruptcy order is made, they will only be able to correct your record if you write to them.

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Though sometimes it’s clearly the only course of action to take when debt has completely spiralled out of control, bankruptcy may not always be necessary. There are a number of organisations that specialise in offering free advice on the various alternatives, and we highly recommend consulting an insolvency expert to discuss your individual circumstances. However, as an overview you may want to consider:

A Debt Relief Order or DRO

This option is only open to people with debts totalling £15,000 or less. You must have under £50 left at the end of each month once living costs have been taken into account, and have no property or assets worth over £300, although vehicles are permitted to the value of £1,000.

The implications of a DRO are similar to those of bankruptcy, and an application to an official receiver is required. This costs £90, and is non-refundable, meaning even if you are unsuccessful this will still have to be paid in full. A Debt Relief Order lasts for 12 months, during which time interest on any outstanding accounts will be frozen and creditors cannot chase for payment.

At the end of your DRO all outstanding debts will be written off, but there will be financial restrictions that result from the procedure. Credit ratings are severely affected in any instance, and your ability to obtain loans and such like will be reduced in the future.

An Individual Voluntary Arrangement or IVA

An IVA is another legally binding process, meaning that although it has less damaging repercussions than a DRO entering into such an arrangement must be taken very seriously. The process is designed to help clear unsecured debts only, which include overdraft facilities, credit cards, and utility bills. An insolvency practitioner will be assigned to your case, and will oversee the process, ensuring you develop a workable payback plan.

This will be income assessed, but it’s vital to consider that your creditors do not have to agree to this. Only when 75% of all the organisations you owe money to approve the IVA can it be brought into action. An average arrangement can last for around five years before the outstanding debts are written off, providing you comply in full. Failure to do so will result in further action being brought against you, and it’s also worth noting there is a fee involved, and this does impact on credit ratings.

A Debt Management Plan or DMP

The lesser of the three main alternatives to bankruptcy, by contacting a debt management company or charity you can set up a DMP. This will consolidate all debts into one, easily maintained monthly payment, and is only available to people that have some month end cash but could not be considered financially stable.

A Debt Management Plan will affect your credit rating, but far less than the options referenced above. Like an IVA, this must be agreed by creditors before being actioned, and whilst interest is frozen you will be expected to pay back all the money you owe with reduced contributions to allow for breathing space.

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If there’s one thing we all know about bankruptcy, it’s that there are plenty of horror stories surrounding the processes, procedures and aftermath. Needless to say, due to the nature of this type of insolvency it’s always going to be stressful, but being prepared for the outcome can help, understanding what happens after bankruptcy can help reduce the strain.

It’s important to first understand how long your bankruptcy could last. Most individuals are discharged after 12 months, but it’s not rare for this status to remain in place for up to three years. There’s nothing you can do to influence the time scale, other than providing everything asked of you and complying with all court requirements, which will be viewed favourably by the official receiver.

In the event your behaviour is deemed to be dishonest, or the actions that led up to your financial situation are seen to have been irresponsible, then it is entirely possible for a Bankruptcy Restriction Order to remain in place for 15 years. For those less up on taxman talk, that means access to credit, bank accounts, mortgages and even employment can be severely restricted for a very long time indeed.

Once a judgement is made on whether your petition has been successful or not there should be no doubt as to the consequences. You will be instructed on which assets, if any, must be sold to raise money and clear debts, any limitations on your fiscal future will be explained to you, and you will be ordered to pay a monthly contribution towards clearing off the outstanding monies owed. It is vital that you stick to these legally binding agreements, as failure to do so will result in more penalties, if not a prison sentence.

The overall idea is to share out what estate you have, and work towards paying off any balances leftover as quickly as possible. In the best case scenario this will mean a year of major difficulties and personal austerity leading up to being discharged, but this is arguably balanced by the fact that after this period you will be able to return to relative normality, albeit there will always be a record of you having gone bankrupt held in the public domain.

A serious concern for many people is the impact bankruptcy will have on their job. This really comes down to the individual situation, not to mention employer. Those working in financial services, retail and wholesale may well find company policy or government law states they cannot continue in the same line of work after becoming insolvent.

In any case, you will not be able to act as an MP or company director before your discharge. In contrast to common assumptions, most pensions approved by HM Revenue are not considered part of a bankrupt’s estate, and as such whilst payments in may need to stop until creditors are satisfied, there’s very little chance you will lose the fund altogether, subject to individual terms and conditions, of course.

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The decision to begin a petition for bankruptcy is certainly no easy one, with serious repercussions that must be considered. As such it’s good to know that if and when such steps are necessary there’s plenty of help available. So let’s answer the question “How do I apply for bankruptcy?” ..

In the initial stages it’s vital to seek independent advice on your application for bankruptcy. There are numerous organisations that can look at your individual circumstances, offer information on filing the correct paperwork or even suggest alternatives to relieving your debt crisis. The process is always easier with some prior knowledge, mind, and there are several steps that must be taken in any instance.

First of all it’s important to understand the criteria for bankruptcy. Currently, you must owe out a minimum of £750 to one or more individuals or companies. Further to this, the total assets available to you- including savings and property- must be less than the total amount of debt for your petition to be accepted.

If this is the case then the most important next step is to get organised, by making sure all financial documents are in order. This will make the procedure far quicker for everyone involved. Only when bank statements, tax notices and similar have been collated is it time to file papers, as you will need this information to complete the paperwork required.

In order to initiate an application you will need to download and return ‘the petition’; Insolvency Rules 1986 form 6.27. Herein include a request to the court to be made bankrupt, and explain the reasons why this situation has arisen. You will also be required to complete and return ‘the statement of affairs’, Insolvency Rules 1986 form 6.28, which can be accessed via the same website. This takes the form of a complete list of all creditors, along with their names and addresses, and a ‘Statement of Truth’ testifying all the details are honest and accurate.

Both have to be submitted to your nearest court, and there will be a fee to pay. In England & Wales this is currently set at £175 for the court, and £525 for the official receiver (who will be assigned to oversee the distribution of your estate). In Northern Ireland the costs are £115 for court, £345 to the official receiver, and £7 for solicitor’s charges. All payments must be received prior to a judgement being made on your application.

 This is non-refundable, so even in the event of an unsuccessful petition the costs will still be due, which means you really need to be sure the application will be accepted prior to initiating proceedings. In some circumstances an individual may be eligible for a discount, for example if they have been made redundant, have a low income or receive certain benefits, again highlighting the importance of seeking expert advice before even considering to file for bankruptcy.

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They say moving house is one of the most stressful things we can do in life. And whilst this is true, the pressures of relocation are nothing when faced with the threat of repossession and court action resulting from debts that have spiralled out of control.

It’s a situation that can arise easier than people often think. In the current financial climate the risk is even greater than usual, as savings interest rates remain at an all time low, credit card APRs continue to climb, and utility prices prepare to skyrocket, again. Suffice to say, overspending on just a couple of months can leave you more than out of pocket and struggling to find spending money.

Though far from the only option, bankruptcy is the most recognisable process by which people can escape large amounts of debt. Not for no reason, this is because of the huge impact it has on the individual concerned, and the severity of proceedings. As such considering all the options available is essential in order to avoid making rash decisions that can lead to major repercussions in the long run.

 Nevertheless, bankruptcy remains an essential tool in the management of bad debt. In order to make an application against an individual, or for an individual to file for bankruptcy, the situation needs to be serious to the point where there is little to no money available with which to repay balances. As a rule of thumb, £750 or more must be owed out to one or more creditors before any other factors are taken into consideration.

More evidence will be needed, however, in order to prove there is a sufficient requirement for bankruptcy. Taking into account possessions and assets, including but not exclusively any vehicles, property, and savings, you will need to owe out more than could possibly be repaid if all the aforementioned were sold.

Only if this is the situation can an application be successfully made to court, which will in turn result in proceedings to distribute your estate and arrange for a payment plan, in line with earnings, to be set up for the foreseeable future. Discharge usually taking place after 12 months, but financial restrictions on access to credit remain in place for varying amounts of time, decided on a case by case basis.

A key point to bear in mind is that even if you owe more than the required amount to qualify for bankruptcy this may not be a necessary course of action. Debt Relief Orders, Individual Voluntary Agreements, and Debt Management Plans are all examples of alternatives that could be more suitable, with less serious consequences. That said, it’s important to note that in all instances credit ratings will be affected, although most would agree that’s a far less worrying prospect than mounting piles of urgent mail, constant phone calls to angry creditors, and an ever-increasing month-end deficit.