Every year, more than 100,000 people enter a personal insolvency solution. But the current regime, which has been in place since 1986, has not changed substantially or been reviewed for a long time. The most recent major change was the addition of Debt Relief Orders, which came in after the 2008 financial crisis.
But elsewhere, although bankruptcy has been modified, it has its roots in the Victorian era. A widely-used option, the Individual Voluntary Arrangement (IVA) was introduced in the mid-80s, before the proliferation of credit options for consumers that we see today. Last year, more than 80,000 people used an IVA.
“When IVAs were introduced in the mid-80s, they were really designed as a rescue mechanism for tradespeople, for whom bankruptcy would have an impact on the way they traded. In the first few years, they were only used by around 2,000 people each year,” explains Angela Crossley, Director, Strategy, Policy and Analysis, for the Insolvency Service.
The bulk of people that turn to IVAs are now consumer debtors who have run up debt through catalogue finance, credit cards and bank loans. “That’s not really what they were originally designed for,” Crossley says. “IVAs are a very flexible tool, and for many people they offer a good solution. But we want to look and see if they work as well as they could, alongside the other insolvency options that are available.”
Crossley is concerned that a lot of people in financial difficulty are vulnerable to being talked into an arrangement that is not really appropriate for them. “Most people going through an IVA come to an arrangement to pay their creditors a certain amount every month. For a lot of people that works really well.
“But at the margins, you get people who can’t really afford an IVA and go down that track and get one. However, they might have found it better to do something else, rather than make significant payments out of a small income for several years. You need to look at how much creditors actually get back in that scenario, and whether it’s the right thing for both parties,” Crossley adds.
Although widely used, IVAs are just one part of the overall framework, and the Insolvency Service is running a call for evidence drawn up with the assistance of four academics – Professor David Milman (Lancaster University), Dr Joseph Spooner (London School of Economics), Dr John Tribe (University of Liverpool), and Dr Katharina Möser (University of Birmingham) – to find out how effectively the whole personal insolvency regime operates.
“If you’re an individual and you get into financial difficulty, it’s really confusing to know what the best thing to do is,” says Crossley. “You can do a Google search and end up going down a completely different path to the one that you might have tried if you had spoken early to a professional adviser.”
The Insolvency Service says it wants to ensure that the personal insolvency framework strikes the right balance for all those who are affected by insolvency – especially debtors and creditors. The insolvency regime is understood well by the debt advice sector and by insolvency professionals, but for most people, it can be confusing, Crossley admits, with the proliferation of information of varying quality on the internet only serving to further confuse people.
“You need to have something that works for people in debt, but also for people that are owed money, who are entitled to expect it back,” Crossley says, and part of the call for evidence is about where the balance should be.
“We’re very open to suggestions for how it could be improved,” says Crossley. “If we could get to a place where it’s easier to navigate and people really understand what their options are, that would be a positive outcome.”
However, Janet Mayo, an Insolvency Practitioner at Angel Advance, is concerned that the call for evidence is too narrowly defined bearing in mind that it considers only statutory insolvency solutions and fails to take into consideration other solutions, such as debt management plans and settlement agreements, that form part of the picture.
“The vast majority of bankruptcies are applied for by the individual rather than a creditor – more than 80% – and that’s an indication that bankruptcy has lost its punitive nature. However, there are still barriers to entry in terms of it being a costly procedure and the other implications, such as the termination of tenancies, hire purchase agreements and mobile phone contracts,” Mayo says.
The personal insolvency regime is complex with numerous options with varying levels of regulation, some overseen by the FCA and others by insolvency practitioners or the Insolvency Service. It is, therefore, a minefield for vulnerable individuals. All solutions are based on the concept of “disposable income”, which is a subjective measure and can significantly impact advice.
Mayo is also concerned that the fragmented nature of the market for personal insolvency advice is at best unhelpful: “Currently providers are a mixture of charities, government agencies and commercial providers and they are variously funded by grants, creditor contributions to some charitable and commercial providers and fees. This will inevitably lead to varying quality of advice and bias to particular solutions.”
Any analysis of the market should also take the causes of debt into consideration, Mayo believes, and current workings of the system should be under the spotlight. In particular, the consultation should consider whether tighter regulation of lending levels, extension of credit card limits, and embedded credit agreements are needed.
There are also questions about whether the scope of the consultation should include financial education and the way finance is – or isn’t – taught in schools. “What’s also true is that the current maths curriculum leads to many having a sense of ‘I can’t do maths’ when an understanding of budgeting should be as fundamental as learning to read and write,” Mayo says.
It also begs the question whether the review of personal insolvency should be part of the larger review of all insolvency solutions. Many company insolvencies are of owner-managed businesses and tied up with the personal insolvency arena.
Though a minority of people in the insolvency system have abused people’s trust and the regime needs to cater for that too, Crossley is mindful that a lot of people get into debt because they are unfortunate. “Something happens to them that may not have been in their control, or they are on very low incomes and struggle when something unexpected comes along, rather than through irresponsibility.
“You’re going to get people who are reckless and careless with other people’s money, and you’ve got people who have lost their jobs, become ill or their family circumstances are changing. Through no fault of their own, they find themselves in financial difficulty.”
However, focusing too narrowly on specific measures would be nothing short of a missed opportunity, Mayo warns. “In difficult times any changes to the regime need to consider a broad picture of how they could lead to individuals continuing their lives on a more stable financial footing to support the UK economy.”
The call for evidence is open until 23 October 2022.
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