Contingent debts in insolvency

The law on including debts payable in future is different for debt relief orders (DROs), bankruptcy, and individual voluntary arrangments (IVAs).

Contingent debts in debt relief orders

A qualifying debt in a debt relief order must be for a liquidated sum payable either immediately or at a certain future time.[1] Debts that rely on something else occurring, for example, a bill being issued or a guarantee being called in, are not qualifying debts.

A liquidated debt means the amount of money is fixed.

Contingent debts in bankruptcy

A bankruptcy debt includes any debt or liability the debtor either:[2]

• is subject to at the commencement of the bankruptcy

• might become subject to after the commencement of the bankruptcy under an obligation incurred before the bankruptcy

An example of an obligation incurred before the bankruptcy is where the bankrupt breached an agreement before their bankruptcy, but the court claim for damages happened afterwards.

Contingent debts in an IVA

Individual Voluntary Arrangments follow bankruptcy, so they can include contingent debts as long as the liability is listed in the proposal.

Council tax liability is calculated as a daily amount.[3] It is usually paid as a monthly amount. Some taxpayers pay their annual amount over 10 months.

The annual bill runs from 6 April of one year to 5 April of the next.

A taxpayer who fails to pay on time could be issued with a reminder notice. Once a reminder notice has been sent, the taxpayer normally has seven days to pay what they owe. If they do not pay their arrears, the full year's balance falls due.[4] This is the estimated amount calculated until the following 5 April.

Council tax arrears in a DRO

The debtor could calculate the daily amount of council tax that has fallen due on the date of the DRO application.

Read more about calculating council tax as a daily rate.

The full amount for the financial year can be calculated if the debtor has lost the right to pay by instalments because they have received a reminder notice, which has expired.

Council tax arrears in bankruptcy

The liability to pay the current year's council tax exists before the date of the bankruptcy. That means all council tax due before the end of the financial year (next 5 April) is a bankruptcy debt.[5] This applies even if a bill has not been issued for the current year.

Council tax arrears in an IVA

The liability to pay the current year's council tax exists before the date of the IVA. That means all council tax due before the end of the financial year (next 5 April) is an IVA debt.[6] This applies even if a bill has not been issued for the current year.

A guarantor might apply for a DRO, bankruptcy, or an IVA.

Whether the guarantee debt is written off as part of the insolvency depends on the type of insolvency and in some cases, whether the guarantee has been called in.

Guarantee debts in a debt relief order

Whether or not a guarantee is a qualifying debt for a DRO depends on the agreement. The guarantee must have crystallised for it to be included in the DRO. That means the guarantor's liability to pay the original debt has been called in.

Crystallising the debt could happen automatically, following the debtor's failure to pay. A guarantor for rent payments could be liable the day after the rent payment falls due.

Consumer Credit Act agreements

For agreements regulated by the Consumer Credit Act 1974, crystalling the guarantor's liability can only happen after the expiry of a properly served default notice.[7] It could also require a demand for payment from the creditor.

Default notices must be served on the debtor and the guarantor.[8]

Voluntary payment by the guarantor does not count as enforcing security, whether the creditor has requested payment or not. A DRO intermediary must check the agreement and default notice to satisfy themselves that the guarantee liability is a qualifying debt.

Guarantees in bankruptcy

The guarantee is a liability to which the bankrupt may become subject to after the commencement of the bankruptcy by reason of an obligation incurred before the commencement of the bankruptcy.[9] That means it is discharged in bankruptcy, whether the guarantee debt has crystallised or not.

It does not matter if the guarantee crystallises before the bankruptcy, before discharge from bankruptcy, or after discharge.

Guarantees in an IVA

A guarantee liability should be included in the debtor's IVA proposal to creditors. The creditor has voting rights if the guarantee has crystallised. Guarantees that have not yet crystallised are given a value of £1 in the IVA proposal.[10] The IVA convener could give the liability a higher estimated value.

The creditor of an uncrystallised guarantee liability is not permitted to vote for or against the IVA proposal.[11] Uncrystallised guarantees are bound by the terms of the IVA, and the guarantor's future liability is discharged if the IVA completes successfully.[12]