This article looks at the public policy implications of the current high bankruptcy fees in England, Wales and Northern Ireland: £680 (£659 in Northern Ireland) is a big obstacle to fairness at the moment, causing people stress and sometimes leading them to make poor choices between debt solutions.
If you want to go bankrupt and can’t afford the fees, this is not the right article for you. Instead, read ideas for how to get the money for bankruptcy fees.
What if bankruptcy fees were, say, £5,000?
Ridiculous idea, isn’t it… why would you want to charge people who need to go bankrupt more than they can possibly afford? That would be preventing people from going bankrupt who need to.
But for a large number of people for whom bankruptcy is the “correct debt solution”, the current level is just as absurdly out of reach as £5,000 would be. Most people contemplating bankruptcy have immediate financial problems with bills and debts they can ‘t pay. They don’t have £680 spare in a bank account; the money that is there is required for the rent, food and heating.
I wonder if the Insolvency Service thinks £680 is a figure that most people should be able to pay pretty easily – because it isn’t.
What do people do when faced with these high fees?
I am concerned here with the large majority of people going bankrupt who have little disposable income. Less than 20% of people have to pay an IPA after bankruptcy.
Borrow the money and go bankrupt
This doesn’t have to be as blatant as taking a payday loan or withdrawing cash on a credit card. Someone can acquire cash by not paying essential bills such as council tax or utilities, or using any headroom on their overdraft, or paying for essentials that they would normally pay for in cash on a credit card instead. This approach is supposed to be frowned on by debt advisors.
Some combination of these over a couple of months is highly unlikely to be noticed by creditors or the Insolvency Service, so this can work for the people with enough nous and resources to manage it. The most vulnerable or people with a low disposable income who have no spare credit are unlikely to be able to do this.
Stop paying their other debts and save up the money
I guess this is what the Insolvency Service thinks should happen. It’s OK for people who aren’t vulnerable and who are making large debt repayments, so that if they stop they can save up the bankruptcy fees in a few months.
It won’t work at all for people making low or no payments to their debts. And for vulnerable people, this approach is stressful – they will worry about phone calls, letters, court action and bailiffs. Some of them may make unaffordable payment arrangements – a transfer of money from “responsible” creditors to the more pushy end of the spectrum and delaying bankruptcy further.
Carry on paying their creditors and still save up, but a bit slower?
The Standard Financial Statement says a debtor can save £20 a month, so that would take about three years, assuming no need for emergency cash happened in the meanwhile. Not practical!
Get help from a trust fund
This can work but doesn’t always. As Anna Hall from Citizens Advice says:
Although there are funds available from, for example, utilities companies, to help [with bankruptcy fees], these tend to run out at the end of the year. The funds are replenished again in April so until then we have people waiting, in a kind of financial limbo.
It can be time-consuming for free sector debt advisers – many trusts require debt advisors to ask if creditors will write off interest first. At a time when free sector debt advice is a commodity in short supply, this seems to be pretty inefficient. And some people dislike “asking for charity” to get help with the fees, or feel they would be rejected, so “no shows” for appointments for grant applications may result.
It doesn’t seem to be desirable to set the bankruptcy fees at a level where this is often required.
Give up on bankruptcy and make token payments or ignore their debts
No-one knows how many people fall into this group at present. Some clients prefer to try to muddle through rather than go bankrupt and the high bankruptcy fee is an obstacle to convincing them to go for a clean start. The high fees may discourage people from taking debt advice at all, as they can clearly see they can’t afford the bankruptcy fees.
The new MAS report on the financial benefits of debt advice didn’t try to quantify the economic benefits from people going bankrupt, but it would seem logical that they would include gains from better mental health and productivity at work. Where we are now in the economic cycle, with a major buildup of personal unsecured debt, and facing the uncertainties of Brexit, having people trapped in long-term unmanageable debt doesn’t seem like a good idea for either the people concerned or “UK plc”.
Get an IVA instead
An IVA is a bad idea for anyone who wouldn’t have to pay an IPA in bankruptcy – they are being locked into payments they can’t afford without hardship for five years and their IVA may even fail. But the high level of bankruptcy fees makes it easy for lead generators and the less scrupulous IVA firms to mis-sell an IVA. “Another debt option for you would be bankruptcy. The bankruptcy fee is £680 up front. …” from that point on the debtor has probably decided they can’t afford bankruptcy.
Again no one knows how many people have been sold IVAs when bankruptcy would be a better option for them. I have seen too many people whose IVA proposal records them as saying they prefer an IVA because of the increased dividends for creditors… when they have no idea what that means and were never given an adequate description of bankruptcy or an IVA to make an informed choice.
The Insolvency Service should be very concerned that debtors whose most suitable option is bankruptcy are being talked into IVAs. Reducing the bankruptcy fees won’t eliminate this, but it will remove a significant factor putting people off bankruptcy.
Arguments for keeping high fees
People who can afford it should pay towards their bankruptcy
Yes, obviously they should. But if someone goes bankrupt with a spare £680 sitting in a savings or investments then it is claimed by the Official Receiver anyway. And if they have spare income, then they will be paying an IPA for three years. So the people who can afford it are already contributing – all the current fees do is attempt to extract money from people who can’t afford it.
Isn’t it good to have high bankruptcy fees as a deterrent?
No it’s not. Bankruptcy is not some moral failing that needs to be discouraged. There is nothing ethically better about someone experiencing hardship in an IVA or being stressed by having unmanageable debt for prolonged periods.
People should be enabled to choose the debt solution that is most appropriate for them. The current high bankruptcy fees distort and delay this process.
Wouldn’t low fees let people rush into bankruptcy too easily?
If this is felt to be an issue, it should be tackled directly, because the effects of high bankruptcy fees are too damaging.
The Insolvency Service needs the money
Just under 12,000 people made themselves bankrupt in the last year, producing a total fee revenue of nearly £8million. If the Insolvency Service gets less income from these fees, it may have to increase other fees – in the end creditors will probably pay the bill. But at the moment creditors often end up paying the current bankruptcy fees, whether this is directly through people borrowing more or indirectly through existing creditors not being paid whilst the fees are saved up.
Employment Tribunal fees – an aside
I thought it would be interesting to include a couple of quotes from the recent Supreme Court Judgment finding that high Employment Tribunal fees were unlawful:
In English law, the right of access to the courts has long been recognised. The central idea is expressed in chapter 40 of the Magna Carta of 1215 (“Nulli vendemus, nulli negabimus aut differemus rectum aut justiciam”), which remains on the statute book in the closing words of chapter 29 of the version issued by Edward I in 1297: “We will sell to no man, we will not deny or defer to any man either Justice or Right.” Those words are not a prohibition on the charging of court fees, but they are a guarantee of access to courts which administer justice promptly and fairly.
The question whether fees effectively prevent access to justice must be decided according to the likely impact of the fees on behaviour in the real world. Fees must therefore be affordable not in a theoretical sense, but in the sense that they can reasonably be afforded. Where households on low to middle incomes can only afford fees by sacrificing the ordinary and reasonable expenditure required to maintain what would generally be regarded as an acceptable standard of living, the fees cannot be regarded as affordable.
Some people are considering whether bankruptcy fees could be legally challenged with this precedent. Not being a lawyer, I will just say that I think morally exactly the same reasoning should apply to bankruptcy fees.
So what should change?
Before April 2016, there was means testing for the court fee element of the bankruptcy fee: debtors that met the court standards for fee remission only had the pay £525 to the Insolvency Service. As the court fee was no longer needed with the new online application, this means testing ceased to apply and the Insolvency Service decided not to introduce any itself.
Reintroducing similar means testing would be simply inadequate – too few people qualified for it and those that did were manifestly unable to pay the remaining £525 fee. Any means testing would have to be considerably more generous, both in the numbers of people that qualify and the fee remission available.
Any means testing will cost money to administer as well. It may actually be cheaper and simpler to reduce fees for everyone, rather than have means testing that would give over half the applicants lower fees, especially as anyone who does have spare savings will lose them anyway on going bankrupt.
Pay fees after bankruptcy?
This may sound like a neat solution until you consider that most people don’t have to pay an IPA because they don’t have enough spare income. If they have to pay the bankruptcy after they have gone bankrupt, then they are likely to be again getting behind with essential bills – not the point of bankruptcy.
Cut the fees
This, to me, is the obvious answer. I think the fees should be reduced to £90, the level of DRO fees. At that level there will still be a people who can’t afford it but this would be far fewer and grant applications can then be used to help those people.
An alternative would be to reduce the fee to say £200, which is what it is in Scotland, but also provide full fee remission with a means test.
Allow more people to enter DROs
The Insolvency Service could also look at reducing its own costs by changing the DRO criteria. I can’t think of a good reason why someone with 25k of debt, renting and with less than £50 a month DI should have to go through the more expensive bankruptcy procedure. Nobody gains from this at all. 30k was proposed as the DRO limit a few years back – it’s time to implement that.