You could lose your pension if you don't pay your bills

For the first time, a High Court judge has ruled that a pension could be drawn down and used to pay creditors.

When you're made bankrupt, any income you are receiving is taken into consideration by the court. The judge will decide how much you can afford to pay to your creditors on a regular basis during bankruptcy, if anything.

Usually you'll be ordered to make payments from income for three years. This income could be from paid employment, from benefits or even from pensions.

Before 4th April 2012, if you hadn't already started to take benefits from your pension in the form of a lump-sum payout or monthly income, your pension was not considered in the bankruptcy proceedings except in rare circumstances.

Your pension pot was out of the reach of your creditors.

Unclaimed pension pots now accessible to creditors

But, last week, a High Court judge called Bernard Livesey QC, ruled otherwise.

Bankrupt Michael Roy Williamson has a pension pot worth £1 million and he has not started taking an income from it. However, he is already entitled to do so, having reached the age specified in his pension plans. Hence, the judge said that he did not see why Williamson's pot should be protected when others of pensionable age who have started to claim their pension incomes are forced to give up part of that income to their creditors.

Williamson lost the battle to save his pension from creditors despite claiming to still be in work, to have no reason to start taking benefits from his pension, and despite saying that he should not be obliged to do so.

Could this happen to you?

The result of this case might only be a problem for those who have reached an age where they could take a pension but have not yet elected to do so. The age you can elect to take benefits from your pension varies depending on the rules of the pension scheme you're part of.

Not everyone who is in this position will be affected, however. As Livesey put it in his judgment, no bankruptcy order should reduce the bankrupt's income below the “reasonable domestic needs of the bankrupt and his family”. This means that if you will need all of that pension income for your basic needs then no judge should rule you give part of it up for your creditors.

The judge also pointed out that particular circumstances of the case need to be taken into account during hearings related to bankruptcy: “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.”

How bankruptcy has changed

Despite this, Spearing Waite, the law firm acting against the bankrupt, believes this ruling to be the biggest news in bankruptcy law in 13 years. This depends on your perspective.

A few years ago we got a new, cheaper form of bankruptcy called a debt relief order, which is bigger news for poorer people, in that it enables them to call it a day on their debt struggles more easily. I wrote about this in Go bankrupt for less.

Also in the noughties it was made easier to get an earlier discharge from bankruptcy and to get credit sooner after the bankruptcy ended. The length of the ban on bankrupts becoming company directors also shrank. These can all now occur within 12 months.

It's not over

13 years ago we got the Welfare Reforms and Pensions Act 1999, which is what Ashwin Mody from Spearing Waite was referring to. This Act made it easier to go bankrupt and protected most pension pots from bankruptcy proceedings.

It is because of that Act that this case could go to the Court of Appeal, which may or may not reverse the High Court Judge's ruling.

If you're struggling with debt, free charities such as National Debtline and the Consumer Credit Counselling Service offer fantastic advice, as do discussion boards such as Dealing with Debt.

More on debt:

New dodgy debt clampdown for 2012

The forgotten victims of financial abuse

Edwina Currie is part of the UK's debt problem