This article builds on the arguments I put forward in Coronavirus – how the debt advice sector should be planning, looking at one area that needs to be tackled urgently – personal insolvency.
Coronavirus will cause a large increase in the numbers of people who should choose insolvency over the next couple of years. I am not trying to predict how many, but it is likely to be large enough to cause major problems for debt advisers, the Insolvency Service (IS) and Insolvency Practitioners (IPs) to handle well. So we need to identify now how the current processes can be streamlined, improved and simplified and bring in those changes before the numbers are known.
This isn’t just good for the individuals, it’s desirable for the country. Poverty and problem debts are often interlinked. Help resolve someone’s debts and you help their mental health and the life chances of their children. Impossible amounts of unrepayable debts act as millstones around people’s necks and will cause an economic recovery to be anaemic.
In Scotland it is being proposed that the maximum debt level of MAP bankruptcies is increased from £17,000 to £25,000, creditor bankruptcy petition amounts are increased to £10,000, and MAP and bankruptcy fees are reduced.
Equivalent changes in England, Wales and Northern Ireland would be a good start… but these would not be enough because here personal insolvency was already in a mess before Coronavirus.
In making changes to cope with the expected increase in insolvency numbers we need to recognise the current problems and ensure the changes reduce them, not make them worse.
There are major problems with all three types of insolvency.
Contents
Bankruptcy fee is way too high
£680 is an absurd amount to charge someone who needs to go bankrupt. Most people who go bankrupt have little money or are already in their overdraft. And many have negative disposable incomes, making it impossible to save up the money without running up more debts or arrears on bills.
Charging this amount makes some people give up on bankruptcy completely or it prolongs the period before someone can go bankrupt:
- they may opt for an IVA even though they would not have to pay an IPA in bankruptcy at all and that IVA may later fail (see below);
- they may just try to ignore their creditors, thinking there is no debt solution open to them.
- it can generate large amounts of work for debt advisers trying to support the debtor while they save up over a long period or make grant applications – which have got considerably harder over the last three years.
For the people who can afford this fee, the money in their accounts would be claimed as an asset by the Official Receiver anyway! So the Insolvency Service is only better off to the extent that it can either put people off going bankrupt (and so save itself some work) or it can pressure some debtors into coming up with money they cannot afford. Neither of these are desirable.
In 2019, the bankruptcy fee generated less than £12million in income for the IS. The IS needs to find some other way to balance its books. The people that ultimately have to bear the costs of all insolvency are the creditors; trying to charge the person in debt misses the point entirely.
I suggest:
- the bankruptcy application fee should be reduced to £200;
- it should be waived entirely for anyone in receipt of any means-tested benefits.
Anyone who thinks this suggestion is too radical needs to explain how people with negative disposable income – less than they need for the necessities – can save money for these fees. Or why they should be excluded from bankruptcy if they can’t.
DROs – too complicated
DROs are a success story. Simple for the IS to operate, very low failure rate, an excellent option for many very distressed clients.
Debt advisers suspect many of the people whose IVAs are failing (see below) should have had a DRO instead. And if Cornavirus results in a lot more people who have lost their jobs or see major income drops, then DROs may be a good option for many of them.
But the current DRO application process is too cumbersome for debt advisers to set up. DRO applications currently often take 10 weeks or more because of the need to list every debt and double-check the debt amount.
Even after this long process, debts can later appear, such as benefits and tax credit overpayments. This is proving an increasing problem at the moment as people move over to Universal Credit and debts the client was unaware of emerge. At the moment these “old debts” are not included in the DRO and the client can’t have another DRO for 6 years.
The application process will cause a log jam if a lot more DROs are required. This could be tackled by recruiting, training and funding many more debt advisers. But an alternative approach of making DROs simpler to set up seems preferable.
CAP suggested last year that the DRO rules on omitted debts should be brought in line with bankruptcy rules. This would be a major improvement.
It also needs to be combined with increasing the DRO limit. Debt advisers see clients who would be “clear DRO cases” apart from the fact they owe more than the current limit. And increasing the limit would also ensure that fewer DROs later fail if a new debt appears that takes the client over the limit.
DROs are intended as very simple forms of bankruptcy, where there are minimal assets and no IPA would be set. What is the point in making someone with say £35,000 in debts go bankrupt? It costs the IS more to process the bankruptcy and creditors still end up with nothing. Why is there a maximum limit on the amount of debt in a DRO at all?
The DRO fee may be only £90 but it is still difficult to save up for clients on benefits often with negative disposable income. I suggest that it should be waived for clients on means-tested benefits or with zero income. Update – in January 2021, the FCA’s Woolard report identified the £90 fee as an obstacle to people starting DROs.
So for DROs I suggest:
- omitted debts should be included, in line with bankruptcy rules;
- the debt limit should be scrapped (or raised to something very large such as £50,000);
- fee waiver for clients on means-tested benefits.
IVAs – far too many are failing
Since 2015 the number of IVAs has soared, while bankruptcies and DROs have remained largely unchanged. This at a time when falling disposable incomes would have been expected to reduce the percentage of people who IVAs are suitable for. IVA failure rates in the first few years are also increasing:
Current one-year IVA failure rates have risen from a recent low of 4.1% for 2013 registrations, to 8.4% for 2018registrations, the highest rate since 2002. The 2-year failure rate: for 2011 to 2014 registrations the rate was around 11% before increasing in subsequent years to a rate of 19.5% for 2017 registrations. This is the highest rate since 2007. The three-year failure rate relating to 2016 registrations, of 25.1%, is the highest since 2009.
StepChange has pointed out that its early failure rates are a lot lower than the market average. Some firms therefore have much higher rates… It is unconscionable that consumers are kept in the dark about this when they set up an IVA.
(I am not going to comment on the Insolvency Statistics for April 2020 published last week which showed that bankruptcy numbers dropped 46% compared to April 2019, DROs dropped 37% and IVAs jumped by 39%. I think some detailed analysis of those numbers is needed.)
The only plausible explanation for the rising IVA numbers and the rising failure rate is that IVAs are being mis-sold to people who should have a DRO or gone bankrupt. RPB regulation of IPs appears to have been ineffective at preventing this. The IS launched a Call for Evidence on IP Regulation last year but nothing has yet emerged.
I think a range of measures needs to be taken to try to counteract IVA mis-selling:
- IVA firms must publish their IVA failure rate prominently on their website and all advertising and must list the high risk of IVA failure as a disadvantage of IVAs.
- IVA firms can only take leads from IVA lead generators who publish failure rates on their websites and all ads, including social media.
- IVA firms cannot take leads from any firms that advertise in a way designed to look like national debt charities.
- IVA firms can only take a lead if it is accompanied by phone recordings of all calls with the debtor and these need to be retained. If these are missing it will be assumed the debt may have been given poor advice and the IVA will be treated as mis-sold.
- Large fines must be imposed for every IVA that is found to have been mis-sold. I would suggest £20,000. A fine has to be many times larger than the profit a firm can make on a case, or it will still be profitable to have a high failure rate.
- If an IVA is found to have been mis-sold, the IVA should be completed on the basis of the funds paid to date, so the debtor does not have to go for a DRO or bankruptcy.
- Any IVA where there is no property and a monthly payment of less than £100 should not be set up unless an FCA authorised firm has recommended that an IVA is suitable.
In addition, I think there needs to be a broader rethink of who bears what risks in an IVA. Creditors benefit when a debtor gets a windfall – inheritance, redundancy etc. They also benefit if the debtor has pay increases and overtime. But if the debtor has financial problems, particularly in the early years, too often the IVA fails. This is not equitable – it leaves a debtor back with debts that they are now in a worse position to pay than when the IVA started. This may well be an increasing problem with the impact of Coronavirus.
I suggest that if IVA payments can no longer be maintained for reasons that are outside the control of the debtor then they should be reduced without the creditors having to approve it. If they would have to fall below some set level (£60 a month?) then the IVA should be completed, not failed.
Other problems with bankruptcy and DROs
The amount allowed for a vehicle needs to be increased in bankruptcy and DROs. In large parts of the country a car is essential for everyday life, not an optional extra. £1,000 is no longer a reasonable amount.
The “insolvency test” should be reviewed. Workers in the 60+ age group are among those most likely to have had problems because of Coronavirus. It makes no sense that people with money in personal pensions should not be able to go bankrupt/have a DRO whilst people with an employer’s pension can go bankrupt.
The IPA rules should be reviewed. The 2011 changes may have sounded as though they would maximise returns to creditors but they effectively removed any incentive for someone to earn any more money at all. Not the way to get the individual or the wider economy back on its feet.
Conclusion – major changes are needed
The current personal insolvency system needs major changes so that tens of thousands more people can get onto the optimum insolvency solution for them, not the most profitable one for an IVA firm.
These changes are made more urgent with the greater numbers expected to need insolvency with Coronavirus, but they were all required anyway. So the changes need to be permanent, not temporary emergency measures.
UPDATE May 2021 – DRO limits are changing
After a consultation, the Insolvency Service is relaxing many of the DRO criteria limits from June 2021:
- total debt increases.
- level of “surplus income” increases to £75 per month.
- an increase in the general assets and the value of a car.
These are simple changes to introduce as they can be made through the regulations, not requiring primary legislation. The new criteria are set out in What is a DRO?
It is disappointing that the Insolvency Service has not suggested changes in areas that would make DROs simpler to set up, as I have suggested in this article. However, in its summary of the DRO changes consultation responses it said:
The Government recognises there have been significant changes in the personal debt and insolvency landscape over the years, with further changes planned – for example the breathing space scheme, followed later by the new statutory debt repayment plan – and will issue a Call for Evidence on the current personal insolvency framework in due course.
Heather Montgomery says
Agree totally – these minor changes (and they are minor) would be so beneficial for our clients
Louise says
Fascinating article and really gives food for thought. I would love to see these changes implemented. It would have such a positive impact on our clients and ultimately the economy too
Peter Brooksmith says
But wouldn’t the current Debt Management Plans be a better option? There are no charges and enables clients to actually pay their creditors back (rather than creditors having to write off the balances). As someone who has lived with a negative DI and struggled to make rent each month – I know it can be insanely tough. But if we lower the barriers to these solutions – and creditors get stung – won’t they simply stop lending? Then the next time people need to borrow, it won’t be there? In fact, all that I can see happening is interest rates / fees / charges increasing for those who do meet their obligations!
While lenders shouldn’t lend unaffordable, I don’t think many lenders actually intend do this – the goal posts seem to have moved a lot over the years, but why would a lender lend you money if they didn’t think they would get it back? I’ve never actually worked for a bank (I work in retail) – but surely this makes the most sense.
Sara (Debt Camel) says
The problem here isn’t unaffordable lending. That is a quite separate issue. The problem here is that there is a dramatic change in people’s situation because of an event which they could never have predicted and cannot control.
Personal insolvency is there for people who have no realistic chance of repaying their debts in a reasonable time even if interest is frozen in a DMP.
Insolvency spiked after the 2008 crash. It didn’t stop lenders lending again!
Nick Pearson says
I am with you almost 100% but I think the fees for both DRO and esp bankruptcy would still be a barrier even at £200 for bankruptcy. I would suggest a moratorium on all fees for 3 years and then cap them at £50 for both a DRO and bankruptcy.
In relation to IVA’s I want to see a more fundamental reform – namely that any CertDR adviser should be allowed to propose and supervise an IVA, Perhaps with a cap of say £100,000 debt unsecured debts. There is no legal requirement for a nominee to charge any fees so they could be provide free. A while back I calculated thst with a fee free IVA most debtors would be able to have a 2 or at most 3 year IVA term – the creditors would get a better return than with a 5 year IVA where fees charged at present levels. As I have said before, if IVA’s were invented today, NFP debt advisers would be allowed to deliver them. By the same token, if DRO’s were invented in 1986, it would only be IP’s who could provide them.
Sooze says
I applied for a DRO towards the end of February, still haven’t heard anything concrete. I was told at the time to stop paying my debts immediately – now I’m being contacted by my creditors. Twice I have got in touch with the DRO unit, only to be told that I am still waiting to be assigned an adviser. I know the Covid-19 situation means that all business are affected and there aren’t so many staff to do the work, but 12 weeks without even being assigned an adviser seems a bit excessive, especially when it means I am having to fend off creditors.
barbara clafton says
Sooze, where did you make your application for a DRO? was it via an advice agency or did you do it via national debtline online?
Sooze says
Barbara, it was through the CAB.
barbara says
So have you actually made your application, paid the fee etc and are just waiting for it to be submitted and approved? That’s a shame that has taken so long. Our (Not CAB) Face to face advisers (qualified DRO INtermediaries) submit your application online and get notification of approval usually within 48 hours. I am unsure about right now due to the Covid situation, but seems you have had a long delay. So sorry.
Sooze says
Yes, made application and paid fee back in February. Had an initial phone interview very quickly but nothing since, other than them saying waiting for an adviser. It’s very frustrating.
barbara clafton says
Great article and I totally agree that the insolvency options need an update.
From a debt advisers perspective, I find it frustrating that IVA providers dont seem to follow the allowances /trigger figures in an SFS.
I saw one IVA where the client was paying £230 per month , suggested by the IVA provider (Payplan) and when we examined their income and expenditure it was clear that the client only had £88 per month available to pay the IVA company. The allowances they gave were way below what was actually truthful and realistic for the client and way below trigger figures and had caused them real hardhsip for 18 months whilst they were paying the £230 month.
I have seen many IVA’s set up where the client’s best option was very obviously a DRO, but when questioned, they will say that they were pushed towards an IVA. I know fee charging companies will have their own agenda’s for this but I have experienced it with NFP IVA Providers also.
All the points raised in relation to DRO’s would be a massive improvement (no upper limit, no listing of every debt, fee exemption for those who really cant pay) and I personally think bankruptcy should be for those with business debts and liquidation procedures and should not form an option for those with personal debts.
Mark says
Hello,
Loving this website and all the helpful advice.
I work in the Aviation sector and was made redundant last year, I managed to quickly secure another aviation job but now face possible redundancy again.
My personal situation has changed a lot in the last few months and my debts are completely unaffordable. I have 35k unsecured debts and have been contemplating bankruptcy for a few months now.
All my usually household bills are up to date and my rent is up to date but I have stopped making any payments to loans and cards.
I have no assets except for a car which I own outright but its quite old and book value is just £650.
I have the fee for bankruptcy but with the world in a complete mess, I’m wondering if I should just do it or hold off and wait to see if something happens by government.
Exactly what changes I don’t know but what I do know from speaking with many of my friends in similar circumstances, bankruptcies
are going to sky rocket.
There has been endless big companies one after another going into admin and I don’t know if I am just day dreaming thinking something is going to change and make this whole process a lot easier and quicker.
I fear of just going bankrupt and then govt changes the whole system and to be not so punishable to individuals but I’m cut out of the category because I did it before a certain date etc.
Appreciate any views
Sara (Debt Camel) says
I fear of just going bankrupt and then govt changes the whole system and to be not so punishable to individuals
I can’t say that won’t happen.
But I think it’s much more likely the government may make the process easier but with the same end result on people’s credit record records etc.
That is a lot of debt. Bankruptcy now may well be a sensible choice for you, or you may decide to wait a few months and see if you can get another job?
You don’t want to rush into this – but neither do you want to delay. You may not be chased a lot by your creditors at the moment, if you sit back and wait a couple of years and then go bankrupt, you have just delayed your clean start by 2 years.
I think you should talk to a debt adviser and go through your situation – phone National Debtline on 0808 808 4000. They don’t have a crystal ball either, but it is always good to talk through the specifics of your case with an expert.
Mark says
I did go over this with step change and national debt line and both leaned towards bankruptcy. To try and repay this through a DM would just take a lifetime, IVA is not all it seems either.
For my own state of mind, a bankruptcy i think is the way forward and i am ok with that in my head to.
I’ve managed to keep them all quiet for a minute but i think that is because of the current situation. It will be done one way or another but maybe to just hold out another month or so to see if anything changes with the rulings.
I have a lot of friends that are on very old contracts where they have been with their company for so long and all have basically been served notice of redundancy and if you can come back you’ll be on xyz which is like 40/50% pay cut and more hours.
Im almost certain 6mths down the line there will be a spike of bankruptcies.
Thank you so much, just writing this on here is almost like therapy in itself to try and make sense of the situation sometimes.
Mark says
Hi Sara,
I thought I would give a quick update.
A lot of my creditors are on 3mth payment holiday etc and thankfully have made it quite easy to set up and no nagging phone calls either which has been nice.
Job wise – I am now facing redundancy but I am not entitled to anything as I have only been there for a short time.
Given the state of the industry I work in, I have now decided to have a career change and go to Uni on a 3yr full time course which I have been accepted for.
Student finance has been arranged for when the term starts and I believe any kind of student finance etc is not within bankruptcy as it is connected to your salary when you earn over 26k, which will be a few years yet.
If I do bankruptcy before all the uni starts, should I base my earnings on what I have now or what I will be on in a few months time.
To support myself more I also have a “zero hours” flexible contract in the field of work I will be working in and can just pick up shifts around my uni work.
The only downside to this is that the pay can be quite variable depending on what I do.
The hours are generally always there however there is no guarantee.
Thanks in advance for any advice.
Sara (Debt Camel) says
This is why I am not keen on people rushing into bankruptcy – now 6 weeks down the line you have a better picture of what lies ahead and have been able to think about a career change.
If StepChange and National Debtline though bankruptcy was an OK option for you before, it is very likely to be your best choice now.
But you have the questions of timing and what to put down as your income.
So you are working for another month or two?
If you go bankrupt now, you have to put down your current income & expenditure. Then you can tell the OR at your phone interview that you are being made redundant and will be going to uni in September.
Or you could carry on until your job ends and then put down income & expenditure details on your bankruptcy form that will reflect what you will have for the next three years.
Your aim should probably be to only work as much during the first year before you are discharged that means you won’t have an IPA set. Once your are discharged, an IPA can’t then be set up. If you go back to National Debtline they can talk about how much you may be able to earn.
PS I hope you are looking forward to uni!
Mark says
Hi Sara,
Exactly, I have a clear road ahead now on future plans which is nice and I can’t wait to start uni.
The big question is timing and trying my best to avoid an IPA if I can help it, figures will be key to ensuring I have correct amounts given to them.
I’m hoping the OR will be nice to me in some way . . . don’t know how but hopefully they won’t be as scary as I think they are lol.
Thank you again for all your help and advice
Lynn says
Hi Sara, I totally agree to the changes you are proposing. The IVA one is a constant thorn. Some companies seem to make savings in peoples budgets (whether they can manage or not) to make £50 available each month. The reality is they would have been better off with a DRO if the actual reasonable expenditure had been used. I have had reports of IVA companies telling clients that they wouldn’t be allowed xx expenditure which is completely wrong. I would love to see them fined.
Julia says
From a lender perspective, I agree 100%! We have so many examples of poor practioner practice, from failing to update credit reports, to taking MONTHS to provide certificates, to charging extra unexpected fees, to sending us details of other lenders’ clients, to not sending us details before the creditor meeting. It’s unfair on the client, on the lenders and on advice services who have to deal with the aftermath of an inappropriate IVA.
Its an area that urgently needs tougher controls.
Ffionpearl says
Ive only just seen this article and followed the link from the post about increase in MaPS funding. I agree with all the points expressed, particularly that bankruptcy fees are high and IVAs disgracefully mis-sold, especially where firms represent themselves as being advice charities. As an adviser, my rule of thumb with IVAs is to consider whether the client has an asset to protect. If not, its unlikely an IVA is the best option. In 6 years ive seen about 4 people who might benefit from an IVA. If debt advisers working for charities had some control over a fee-free IVA system (or at last ones where lead gens and IPs dont’ make thousands) this would be better. Unfortunately I don’t see creditors and the industry going for some of these proposals in full. Also having heard someone from the IS speak at a money advice forum, it seems they have no plans to lower bankruptcy fees due to the work they put in for the money. In the matter of fees for both DROs and bankruptcies, my worry is that a free system might encourage more people to go bankrupt without taking advice. But MaPS could maybe use some of their new largesse on a fund that advisers could apply to for fees on behalf of their clients with no surplus income. Thereby ensuring the option has been advised by an adviser and encouraging clients to seek advice before taking the plunge in to a mis-sold IVA. And wouldn’t it be nice if we could add a debt to a DRO after approval?
Martin says
I have just learned that there is a good possibility I will be made redundant in the next couple of months (5 months before being discharged from bankruptcy) I thought well at least I would have a bit of money to look after my family for a short while, but if I’m understanding it right my redundancy package approx (£4000) will all need to go to the official receiver which I find totally messed up. I think that should definitely change.
Nightowl says
Hi Martin
Regarding your possibility of redundancy, If your employer is still operating; would it be at all possible for them to employ you for just one day per month (a different job/position/cleaning/odd jobs/anything) for the next 5 months until you are discharged from bankruptcy? £4,000 seems a huge amount of money that would benefit your family.
(I apologize if that is a stupid suggestion, but out of desperation I would at least ask my employer).
Hope things work out for you.
Sara (Debt Camel) says
Unfortunately changing your income like that would dramatically reduce the amount of the redundancy payment.
T K says
Hi regarding iva s my reviews is due and with covid I haven’t been able to spend money and I have managed to save some. I took a mortgage break also.
Can the iva take the money I have been saving I have also worked all the way through this too.
Sara (Debt Camel) says
is the money saved more or less then the mortgage payments you have skipped?
Foggy says
I completely agree with this article and the suggestions made therein, with the possible addition of a call for a system of mediation to be set up between debtor and IP with an independant mediatory body being set up with the power to intervene and to order redress where found to be appropriate, including successful closure of arrangements.
roger wallis says
Great article and I agree with most things you say, I like your comment about IVAs being mis-sold, but how would you prove it has been mis-sold, who will be the judge and jury on this and how can you force a creditor to accept a paid to date proposal when it is not there fault?
Sara (Debt Camel) says
An independent complaints system such as the Financial Ombudsman will be needed if an IVA rejects a complaint of mis-selling. the current RPB complaints mechanism is useless.
A term can be included in the IVA which provides for redress if the IVA is found to mis-sold without the agreement of creditors. If they are worried about an IVA proposal they should start rejecting them at the beginning. The who point of this sort of redress provision is to remove the incentive for mis-selling.