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How council tax arrears of £5,000 could easily cost the home owner £20,000 in as little as three years

Monday, 19th March 2018

Had a really good time with Mr Ed Nestor MBE a few days ago when I popped back to the BBC studios for his Drivetime Show on Radio London.

Although I’ve spoken a good few times with Ed in the past it was only my second time in the studio and we had an hour to get into helping his listeners with debt issues, we started the show with what happens when you don’t pay your council tax, more pertinent as the envelopes have just started landing on our door mats. We also had time to help Carl, another caller, who has £45,000 of debt and was confused about bankruptcy, more on Carl later.

The show opened with a chap who said he was in the throes of being made bankrupt for non-payment of his council tax over a period of three years. Bankruptcy is a serious move for anyone and there has been condemnation from many debt advisers of councils using strong arm tactics of bailiffs/enforcement officers and the threat of bankruptcy to get people to pay the council tax. For this chap though his problems are only really just getting started...... because he is a HOUSE OWNER!

Council tax arrears of at least £5,000

I didn’t know how much this chap owed in council tax arrears but it has to be a minimum £5,000 as the threshold at which a creditor/lender can make you bankrupt changed around a year ago.

To begin the bankruptcy proceedings the council will make arrangements to serve this chap with a statutory demand, this basically is a written warning that you could be made bankrupt, he will have just 18 days to respond by either getting it set aside (dismissed e.g. if you are not the one that actually owes the money, or come to an arrangement to pay the debt), if that fails then proceedings to make him bankrupt will happen after 21 days from receipt of the statutory demand. The fact you cannot pay any debt in a statutory demand scenario is not regarded as a defence to the court to have it set aside or dismissed.

For someone that does not own their property (renting or housing association) then their home is protected but, in this case, because he has an asset, his home, this will eventually be sold to raise the funds to clear the council tax debt.

The sale of his home

Once he is made bankrupt by the court any assets (home or car etc) or potential asset (savings plans possible inheritance & PPI etc comes into this) and transfers to the Official Receiver, often referred to OR. Then around two years and three months after the date of the bankruptcy the OR will, through an appointed Trustee (usually a Chartered Accountant Insolvency Practitioner), begin steps to sell the home. The sale can sometimes be delayed if there are mitigating circumstances from the bankrupt, for example young or disabled children.

The Trustee fees

What I fear here will be the Trustee’s fees. Just putting a junior member of staff on the case for a day, filing, photocopying, drafting documents and telephone discussions will attract an hourly rate of £100 - £125, working on the latter that’s £1,000 to be added to the costs on top of the Council Tax debt and that’s just for one day’s work! Then as more senior staff get involved the hourly rate will climb to a eye watering £250 - £350 an hour.

I have over the years worked with numerous Insolvency Practitioners and seen invoices run into tens of thousands of pounds for what was once a relatively small debt. In this case I suspect the final bill for not paying the council tax for this chap will be around £15,000 - £20,000, very disheartening when you look back and remember the original debt once stood at around £5,000.

The alternatives to the bankruptcy

We didn’t have enough time to mention some alternatives to the bankruptcy and how to try and avoid this at all costs so I will do it here.

If there were enough equity left in the house (difference between mortgage outstanding and house value) then I would consider taking out a secured loan on his property, yes, I know the interest rates can be high but it’s got to be a lot cheaper long term than the Trustee fees as detailed above. Another consideration would be to offer a voluntary charge secured on the property with the council for their debt. When you are desperate you take disparate measures. Failing any of the above then if he had other debts he could consider an Individual Voluntary Arrangement (IVA), it is not uncommon to bind the council tax arrears into the IVA by using the other creditors votes.

But when you go bankrupt that’s it, you pay anything? Right? – No!

Moving onto Carl, he was one of several callers to the show and said he was close to going bankrupt after taking advice from a debt charity. Apparently, he had around £47,000 of debts, including credit cards, and resided at home with mum and dad and the debt charity gave him three options, his first going consumer bankruptcy, the second proposing an Individual Voluntary Arrangement (IVA) and third a Debt Management Plan (DMP).

I liked Carl and it became evident he hadn’t grasped the full picture because he was not aware that with the first option, recommend to him, would mean he would still be paying his creditors in his bankruptcy. The reason being he was found to have £237 disposable income per month after a review of his finances by the charity. This means he would pay circa £8,532 into the pot of the Official Receiver (OR).

The actual cost for the government to administer a straightforward consumer bankruptcy

A straightforward consumer bankruptcy costs £1,990 to administer with a further £150 deducted to set up an Income Payment Agreement (IPA) for 36 months, so you can see why I made that point that he would still pay his creditors during his bankruptcy. According to The Insolvency Service one in seven bankrupts actually pay under an IPA. Another option to consider would be to propose an Individual Voluntary Arrangement (IVA). Some people favour the IVA over the bankruptcy as they feel they are actually trying to pay their creditors something, but the term for this is usually 60 months for non-house owners.

I thoroughly enjoyed this show and working with the talented Mr Nestor, you can pick up the show on the BBC I Player and find the link with the topics and timeline to find that bit that interests you the most, here -

BBC Radio London - Drivetime with Eddie Nestor 4pm - 5pm, Thursday 15/3/2018 

 

 

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