The murky state of debt management is obscuring a clear picture of the personal insolvency world. But as trade body R3 seeks to modernise standard practice, John Brazier takes a look at the current landscape and asks what it is looking to achieve.
A few weeks later, the official quarterly statistics released by the Insolvency Service bolstered the message of growth, showing a continued (if modest) decline in corporate insolvencies throughout England and Wales.
But outside of the corporate arena, “plenty more to do” was more in evidence than “heading in the right direction” – corresponding figures for personal insolvency did not paint an encouraging picture for financially distressed consumers in the UK.
There were a total of 101,049 individual insolvencies during 2013, comprising 24,536 bankruptcies, 27,546 Debt Relief Orders (DROs) and 48,967 Individual Voluntarily Arrangements (IVAs). Despite these figures representing a 16% year-on-year decrease when compared with 2012, the wider picture remains obscured by regional disparity and the proliferation of unregulated debt management plans.
2013 was the eighth consecutive year in which more than 100,000 people in England and Wales entered a new insolvency process – a total that could yet rise in the event of a number of macroeconomic triggers activating.
A rise in interest rates, stagnating wages and legacy debt have all been named as factors that could push more people into debt problems, before ultimately winding up in formal insolvency processes.
Paul Rouse, head of national creditor services at Mazars, believes rapid changes to the housing market in particular could have an impact as 2014 progresses.
“Over the course of the next year, rather than the next quarter, I think we could see a higher volume of creditor petitions if confidence in the housing market improves,” Rouse explains. “In the last few years we’ve seen a drop off in the number of creditor petitions, and I would suspect one of the factors could be the loss of confidence in the property market, and therefore available equity – in other words, creditors do not want to throw good money after bad.”
Yet aside from any external factors, the biggest issue affecting the reported levels of personal insolvency in the UK may be the very question of what is – and isn’t – reported.
The prevalence of informal, unregulated debt management plans is causing real concern, as there are currently no accurate metrics to describe either the number of people enrolled in these plans, the levels of debt involved, or the length of time those in debt spend paying off the sums they have accrued.
Louise Brittain, an insolvency practitioner at Wilkins Kennedy, believes the reported levels of individual insolvencies are being distorted by this hidden world, as well as the recent explosion of payday lending.
“We know that massive and highly targeted marketing campaigns are attracting more and more individuals into using debt management plans and payday loans as ways to manage their debts” she explains.
“In many cases the arrangements are rolled over from one month to the next, and because of the punitive interest or high, front-loaded fees, very little capital is repaid and the individual’s financial difficulties get worse, not better.
“I am concerned that many people using debt management plans or pay day loans will at best eventually end up formally insolvent or at worst end up taking desperate measures to repay their creditors.”
Walking off a cliff?
In the absence of practical answers on making the world of unregulated debt management more transparent, perhaps one way to mitigate its effect is to make broad systemic improvements to the regulated industry, in order to make it more practical for consumers.
In mid-February, the EU’s Directorate-General for Internal Policies, Riccardo Ribera d’Alcala, put forward the proposal that the word ‘bankruptcy’ should be scrapped and replaced with ‘debt adjusted’. The word bankrupt, which has been in use within the English lexicon for about 500 years, derives from the Italian ‘banca rotta’, meaning ‘broken bench’.
Yet while the rebranding idea may not go any further than that, it’s clear that it’s not just the UK Insolvency Service that is re-thinking how we approach and manage personal insolvency on a cultural level.
Insolvency trade body R3 is another like-minded body, and is currently campaigning for a change to the processes behind personal insolvency in England and Wales.
A new set of proposals issued in late January detail R3’s proposals to amend the three primary personal insolvency processes in order to add “balance and cohesion”, offering debtors “better access to debt relief” and “better protection from those recklessly accumulating debt” for creditors.
The language used in R3 president Liz Bingham’s foreword alone is dramatic – phrases such as “falling over the edge”, “personal insolvency explosion” and “beyond the edge” suggest an atmosphere of crisis – although the statistics would seem to agree.
R3 claims the rate of personal insolvency in England and Wales has grown 300% between 2003 and 2013, with 102,000 people entering a formal insolvency between September 2012 and September 2013.
Whilst R3 acknowledges that these figures have “fallen in over the past few years” the body has a clear idea of what it believes the government should do to address the “current wave” of personal insolvencies.
One size doesn’t fit all
The three primary methods of managing personal insolvency – bankruptcy, DROs and IVAs – were designed to offer different routes to suit the individual circumstances of debtors. However, R3 is now seeking to amend “a number of issues and anomalies” that these options present.
Cost of entry to these routes is one of the major sticking points that R3 is looking to address. Under the current system a debtor must pay an application fee of £700, which can present a significant stumbling block to those who have already accrued significant debts. The solution offered is to allow bankrupts to pay the fee by instalments prior to or throughout the process; an amendment that Ed Thomas, insolvency practitioner at Mazars, says is a welcome change.
“Entry fees are a stumbling block for many people” says Thomas, “both in bankruptcy and in DROs, so lowering this barrier would be very welcome, as is the option to pay fees in instalments. This protects the debtor’s interests, but the interests of creditors also need to be protected – it’s about striking a balance between the two.”
Thomas is also in support of R3’s proposal to change how long a bankrupt has to wait until an order is discharged, a period which currently stands at 12 months. Under the new regime, a three-tier process would give applicants a standard three year term of bankruptcy, a three to 15 year term for the “most culpable” bankrupts, and the current 12 month period for the “least culpable.”
“The proposals address the balance required where I think the Enterprise Act (2002) perhaps went a little too far with the one year bankruptcy discharge, which as a trustee I would certainly welcome and change to a standard three year discharge” says Thomas.
“Although there are tools available to the trustee to get cooperation during bankruptcy, those often induce further costs and involve court proceedings. It’s all about segmenting the debtors instead of treating them en masse. If there is a non-cooperative, culpable bankrupt, it makes sense to have more options, such as the three to 15 years discharge period, instead of having to use a one size fits all solution, whereby the trustee is trying to fit a two or three year process into just 12 months.”
Raise the barriers
Since the introduction of the DRO in 2009, it has become the debt management option of choice for those without the necessary assets or levels of debt required by the formal bankruptcy route. As such, it is unsurprising this option is proving to be more popular with younger people – those who have not had enough time to build up a sizeable level of debt, and are more likely to have racked up debts through the use of credit cards.
It is the level of assets and debt required to enter into a DRO that R3 is seeking to amend, by raising the asset threshold for entrance from £300 to £2,000, and the level of debt from £15,000 to £30,000. The move is designed both to widen the catchment criteria, and reduce the number of people entering into bankruptcy, while driving down costs for both debtors and the official receiver – another proposal that Thomas backs.
“The official receiver is often very under-resourced and under-funded” Thomas says. “Removing the burden on the official receiver allows them to do their job in policing the business community by not clogging them up with a mass volume of low maintenance cases.”
Some argue further that thresholds should be raised when it comes to creditors’ petitions, too.
Rouse comments: “The only omission [in R3’s proposals] I found surprising was the current level of debt required to present a creditors petition. There are many people in our industry that think this level needs to be raised; currently it’s £750 which has been in force for a very long time, which hasn’t moved on with the rest of the economy since its introduction.
“Personally I think that the level of debt required should be around the £1,500 to £2,000 mark. Where individuals are declared bankrupt over a sum of £750 to £1,000, there will of course be some blame attributed to the person, but the bankruptcy process is very court-driven and can therefore costly: as the trustee you can find yourself between a rock and hard place.”
It’s that much maligned space “between a rock and a hard place” that R3 are attempting to close with its proposals. Stuart Frith, chair of R3’s personal insolvency committee, believes the current regime is a foundation upon which more flexible processes can be implemented.
“A good personal insolvency regime must strike the right balance between helping financially struggling people get back on their feet, and protecting creditors like banks and businesses from people running up debts without being worried about the consequences” he explained. “Parts of our personal insolvency regime are both too lenient and too inflexible.”
“Action is needed now by the government to make sure the personal insolvency regime can deal with any sustained rise in the numbers of people with severe debt issues.”
So while we are heading in the right direction, it seems there really is plenty more to do by those in charge.