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Introduction
Following a call for evidence in 2022, the government has published a summary of the responses to a questionnaire on reform of personal insolvency legislation in England and Wales. This included gathering views on whether the current framework of bankruptcy, debt relief orders (DROs) and individual voluntary arrangements (IVAs) is appropriate for our times and strikes the right balance between the needs of debtors and creditors.
The call for evidence covered three distinct topics:
- The purpose of the personal insolvency framework and the balance between allowing debtors to move on and allowing creditors to recover their debts;
- Funding personal insolvency procedures;
- Whether the existing personal insolvency procedures are fit for purpose.
Debt management plans, court administration orders and the breathing space and statutory debt repayment plans were outside of the scope of the review.
Responses
The response rate appears to have been low with just 64 responses having been received. However, represented amongst those responses were key stakeholders such as the bodies which regulate insolvency practitioners (IPs); accountancy, advisory and insolvency firms; credit unions; creditors and creditor agents; providers of debt advice and debt campaigners; government and academic bodies; trade and professional bodies and insolvency professionals.
Purpose of the personal insolvency framework
The call for evidence sought views on what the underlying objectives should be for a modern personal insolvency framework and whether these are currently being met.
As one might anticipate, the responses reflected a tension between the interests of debtors, and the advantages to the individuals and to society of being able to move on from debt, and the interests of creditors who are concerned that too many people in debt fall into the “can pay/won’t pay” category. Those in the debt advice sector were concerned that there should be better protection of essential assets (such as homes and vehicles) and additional prevention measures to ensure that individuals are not required to make unaffordable contributions towards debts and fees. Whereas some respondents representing creditors felt that the current framework allows debtors to manipulate income and expenditure figures to reduce the surplus available to creditors.
Responses regarding whether objectives were currently being met varied too, and many respondents commented that it was difficult to reach a conclusion in the absence of full visibility on outcomes. For example, there being limited data available on the returns to creditors in IVAs.
Funding
A major theme in responses on the topic of funding was that the requirement to pay upfront fees for bankruptcy and DROs can be a significant barrier to accessing these procedures. It was suggested that fees should be lowered, and perhaps even abolished completely in respect of DROs.
It will not come as a surprise to those with knowledge or experience of volume IVA providers, that many respondents were concerned about the fees charged in respect of IVAs and the practice of front-loading fees. Front-loading of fees means that initial payments in the IVA are used primarily to pay the fees of the provider and if the IVA is terminated early there can be very little, if any, reduction in the level of debt and little available to creditors. A lack of transparency on IVA fees and completion rates was felt to be preventing debtors from being able to make informed decisions about which provider to use.
In contrast, no clear view was expressed as to who should be responsible for paying the costs of personal insolvency. Debt advice providers felt that creditors (as the ones who make lending decisions) and the government should bear the cost, which would act as an incentive to ensure responsible lending practices are adopted. Others felt it was reasonable for debtors themselves to be expected to bear the costs, with public funding available so as not to present a barrier to access. It was also suggested that as debt relief is a “public good” it should be entirely publicly funded, not least because it makes no sense to charge people to deal with their unaffordable debts.
Fitness for purpose
There were a variety of opinions regarding whether the current framework is working as intended and respondents commented that the age of the legislation (primarily the Insolvency Act 1986), and the way that the framework has evolved over time, has meant there is a lack of co-ordination in how the various procedures operate. Some respondents considered that there was an opportunity to put in place a holistic approach for all debt solutions.
The use, or misuse, of IVAs was considered to be indicative of the lack of co-ordination in the current framework with concerns raised regarding mis-selling, excessive fees and poor service from providers. Concerns were also raised around accessibility and the fact that a person’s circumstances might fall into one of the many gaps between the various procedures available, making none of them truly suitable (for example a person who cannot make regular contributions to an IVA and is unable to pay the upfront fees associated with bankruptcy or a DRO).
Those who operate in the sector will appreciate that poor mental health and unaffordable debt often go hand in hand and respondents expressed further concerns that the framework does not work well for debtors in that position.
Next steps
The government has acknowledged that the call for evidence indicates that there are significant shortcomings in the current regime. Indeed, the responses strongly suggest that there are substantial opportunities for improvements that could benefit both the creditor and debtor communities. The government has therefore announced an intention to develop proposals for reform for further public consultation which it aims to publish in early 2024. We will keep you updated as the proposals are published.
Michelmores provides strategic and commercial advice on a range of corporate and personal insolvency matters. Should you wish to discuss any of the issues raised in this article, please contact Sacha Pickering.
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