Is the personal insolvency regime fit for purpose?

 

What are the current problems with the personal insolvency regime?

Currently, the key issues with the insolvency regime are:

Limits

The limits that are in place are outdated. For instance, the amount that a creditor needs to be owed before making someone bankrupt is still as low as £750. This amount hasn’t been changed since 1986—£3,000–5,000 would be a more suitable scale.

Bankruptcy period

The standard bankruptcy period of one year is too short—it needs to go back to being three years, with an option to come out after a year if you have gone bankrupt through no fault of your own. There should also be an option to extend the bankruptcy period to a maximum of 15 years for the most reckless individuals.

Consistency

There is no consistency as to how the courts will apply a ‘reasonable income’ threshold to debtors. To a certain extent, regional variations need to be taken into account in assessing people’s circumstances—it’s widely acknowledged that there are massive inconsistencies in the way people are treated. The minimum income threshold is too low in that it allows no room for flexibility, debtors are unable to cope with the burden of emergency expenditure or sudden financial shocks. Those thresholds need to be raised to a more reasonable level.

Entry thresholds

The entry thresholds for Debt Relief Order (DRO) for assets (£300 plus a car up to £1,000) and debts (£15,000) are too low. Asset values should be raised to £2,000–3,000, debts to £25,000–30,000. Also if the debtor leaves out or provides misleading information, there should be an opportunity to revoke the DRO. This is similar to the changes made to the Irish regime recently.

Cooperation

Those debtors that don’t co-operate fully with their trustee in bankruptcy need to be dealt with more strictly. At the moment there is a period of one year in which the trustee can apply to suspend their discharge from bankruptcy if the debtor fails to co-operate. Getting an order granted is difficult to achieve, and the trustee only has a year in which to make the application.

Complexity

The insolvency regime is in need of a simplified individual voluntary arrangement (IVA). We need a simplified system, particularly for IVAs relating to consumer credit.

What suggestions have R3 made?

R3 says that the cost of going bankrupt (£700) is too high for people who are already hugely in debt, and that the DRO limits are too low, making them harder to access. R3 calls for a:

  1. three-year bankruptcy process
  2. three-year standard term (rather than current 12 months)
  3. 3–15-year term for the ‘most culpable’ individuals, and
  4. 12-month term for the ‘least culpable’ individuals

The minimum income threshold needs to be increased to £50 per month. The qualifying amounts for debt relief orders also need to be increased, to promote DROs as an alternative to filing for bankruptcy.

Do you think R3's suggestions will make personal insolvency processes more efficient and beneficial to creditors?

Yes. At the moment, people are still turning to payday loan companies and debt management arrangements, which are expensive and don’t deal with the problem, just postpone it. We would like to see more structure applied to the regime and for the insolvency legislation to more appropriately reflect the condition of the UK economy in 2014.

What other reforms would you like to see?

There is a lot more that could be done to make the insolvency regime stronger. For example:

  1. introducing floating charges for unincorporated businesses
  2. bringing back a strict form of criminal bankruptcy
  3. for Companies House to perform basic due diligence as well as acting as only a corporate registry

Do you think it is likely that the government will look to reform personal insolvency processes?

We are consulting with the government on the drafting of new insolvency rules. We are hopeful that some of R3’s proposals will find a way into any new legislation, especially a reduction in the costs involved in declaring bankruptcy and lengthening the standard bankruptcy term. The government has been looking at simplifying IVAs, so maybe provision will be made for them also. As we are still at consultation stage, I cannot say for sure what the government is planning to do, but this is an opportunity to get some much-needed reforms through.

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