Bankruptcy: untaken pensions can be used to pay creditors

People declared bankrupt may have to use some of their untaken pensions to pay their debts, following a High Court ruling.

When a person is declared bankrupt, the courts will assess their income and decide how much they can afford to pay their creditors each month, usually for a period of three years until the bankruptcy is discharged.

Income from pensions already being taken can be used to pay creditors but until now, a pension that was not yet being taken was generally considered untouchable.

That has now changed following the case of a 59-year-old bankrupt with a pension fund of £1m. He was eligible to take the pension but had elected not to do so.

It meant that if he waited the three years until his bankruptcy was discharged before taking the pension, it could not be used to pay his creditors. The trustees in the bankruptcy argued that this was unfair and applied to the High Court for permission to access the pension.

The application was granted by the judge, Bernard Livesey QC, who said that it was an unacceptable anomaly that a person who had decided to take his pension would be liable to pay, whereas a person who had elected to wait would not be liable.

The ruling means that a bankrupt in this situation can be obliged to take his pension which can then become eligible to be used for paying creditors.

There are some safeguards. The untouched pension fund can only be accessed if the bankrupt person has reached the qualifying age to claim it. It means the pension funds of people who aren’t yet old enough to qualify remain beyond the reach of creditors.

Mr Livesey also made it clear that a bankruptcy order of this kind should not be made if it left the bankrupt with an income that was less than reasonable for his domestic needs.

He said: “The court will evaluate what is fair and just between the competing interests of, in particular, the bankrupt and his creditors and make an order which is appropriate in all the circumstances of the case.”

Please contact Neil O’Callaghan if you would like more information about the issues raised in this article or any aspect of credit control and debt recovery.