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Annual Report 2009

Personal over-indebtedness and debt solutions

The problems of distressed personal debtors stem from a rapid increase in unsecured bank and credit card lending, which was already attracting warnings from the FSA during the late 1990s. As the tables below show, bankruptcies and IVAs in England, Wales and Northern Ireland started rising sharply in 2003 and had nearly quadrupled by 2009 when there were nearly 76,000 bankruptcies and over 48,000 IVAs (compared with 28,000 and 7,900 respectively in 2003). Numbers of sequestrations and Protected Trust Deeds in Scotland have also risen rapidly since 2002, accompanied in the last two years by an increased take-up of Debt Arrangement Schemes (DASs). In the same period the numbers entering informal “debt solutions”, notably consolidation loans and Debt Management Plans (DMPs), are also thought to have risen substantially. No authoritative statistics are available, but recent research carried out at Bristol University for the Money Advice Trust (MAT) estimates that there may be in excess of 350,000 DMPs currently in force in the UK, set up by voluntary sector and commercial intermediaries. We also understand from National Debtline and others that many debtors prefer to negotiate informal agreements with their creditors themselves. The numbers of debtors in both statutory and informal debt solutions will probably decline, as households switch from spending to saving, but they seem likely to remain at high levels for some time ahead. However, until the economy grows in line with productive potential, there is a risk that unemployment and, in consequence, insolvency rates could rise still further.

The rise in personal insolvency numbers has been matched by a revolution in the ways in which debt advice is provided and marketed. Although voluntary (not-for-profit) sector organisations such as Citizens Advice, National Debtline, CCCS and Pay Plan continue to play an important role, there has been a large increase in the numbers of commercial debt advice firms, licensed by the Office of Fair Trading (OFT). The Bristol University research estimates that there are now over 150 such firms active compared with 40 in 1999. A high proportion of DMPs and IVAs are provided by the largest commercial firms, which advertise their services widely on the internet and television. In virtually all these firms initial advice to debtors on the most appropriate solution is given over the ‘phone by call centre staff, though IVAs will have to be signed off by the IPs employed by the firms concerned. Surveys indicate that many distressed debtors have difficulty in deciding to whom to turn for advice and what solution is best for their circumstances. A high proportion of debtors who enter DMPs or opt for debt consolidation are likely to be insolvent and could be eligible for bankruptcy and often for an IVA. There are grounds for questioning whether such debtors are always getting appropriate advice. In a survey by the IS of IVAs taken out in financial year 2008-2009, 80% of the respondents taking out an IVA had previously gone through an informal form of debt relief, including 33% who had a DMP. In the IPC’s view there may also be a financial incentive in the form of higher fees for debt advice firms to guide debtors towards a DMP or an IVA in preference to a bankruptcy. Some 29% of the debtor respondents to the IS survey of IVAs said they had not had (or could not remember having had) any other form of debt relief discussed with them before taking out their IVA. IP members of the IVA Standing Committee say that creditors unreasonably refuse some proposals for IVAs or are only prepared to accept them if the debtor’s contribution is raised to a level which may later cause the IVA to fail. This is a complex area for policy-makers.

Debtors’ choices are influenced by their own preferences and personal situations as well as by the advice they receive and the attitude of their creditors. On the face of it bankruptcy might appear to be an appropriate solution for many insolvent debtors, unless either they are in or aspire to take up a type of employment which is barred to those made bankrupt, or if they stand to lose their home. In most cases the bankrupt will be discharged after one year and bankruptcy income orders or agreements last no more than three years. But a 2006 survey of discharged bankrupts’ attitudes indicated that the perceived stigma of bankruptcy had not been significantly reduced by the reduction in the discharge period enacted by the Enterprise Act 2002. The reason cited most frequently for this
by survey interviewees was their inability to repay their creditors. Debtors interviewed frequently cite their wish to repay their creditors as much as possible as a main reason why they opt for IVAs, which normally last for five years. On the one hand, debtors may opt for a DMP or to negotiate their own repayment plans with creditors, either because they believe that their financial difficulties are temporary or they want to avoid bankruptcy but are denied access to an IVA or cannot afford to pay the fees of the commercial sector intermediaries. On the other hand, DMPs offer no protection against harassment from individual creditors and relatively little (and sometimes only temporary) debt relief. In some cases DMPs can last for up to ten years and there are debt advisers who believe that some creditors prefer to put debtors into a DMP to reduce or defer the write-down of the debts involved in a bankruptcy or IVA (85% of bankruptcies in 2009 resulted from debtor petitions compared with 62% in 2000). Against this background any incoming government should consider whether action is needed to help distressed personal debtors to find the appropriate solutions for their problems, including strengthened arrangements for regulating and monitoring debt advice firms. We suggest the following aims and principles should be taken into account:

There should be a suite of “joined-up” statutory debt solutions which offer appropriate debt relief to insolvent personal debtors of all income levels and at all levels of indebtedness and a reasonable level of repayments to creditors from those debtors judged able to make them. Debtors should not, however, be prevented from entering informal debt repayment agreements with their creditors as at present. We are concerned that the rising level of initial costs may be deterring some low-income debtors from entering bankruptcy. The IS should consider removing the £15,000 maximum debt level currently in operation to those wishing to apply for a Debt Relief Order (DRO); There is a need for more “joined-up” government for policy-making on personal indebtedness and insolvency.

Currently, BIS, the Insolvency Service, the OFT and the Ministry of Justice are all involved. A lead government department is needed. So far as possible personal insolvency cases should be dealt with outside the courts; Policy and advice to debtors should be based on authoritative and comprehensive evidence. Specifically, more and better information is needed about both statutory and informal personal debt solutions. The IS has taken a welcome step by publishing meaningful statistics on IVAs and a helpful Guide for Debtors. Government should now require debt advice firms to provide regular statistics on the numbers, duration and completion/failure rates for DMPs (and possibly for consolidation loans) comparable to those now available for IVAs; Further research into the reasons why IVAs and DMPs fail is needed. Between 27% and 32% of IVAs taken out in the period 1997-2007 failed. There is also said to be a high failure rate for DMPs, particularly in the first two years of the agreement. No doubt many failures of both IVAs and DMPs are caused by a subsequent deterioration in the debtors’ finances. In other cases insistence by the creditors on unsustainable levels of repayment or poor advice may play a part. One way of carrying out such research would be to ask debtors applying for IVAs or bankruptcy about their experience with other types of debt solution;

We are not currently persuaded by the case put forward by the Ministry of Justice for a Regulated DMP. In the absence of any statistical evidence it is unclear to us for which types of debtor a Regulated DMP would be suitable. There could well be unhelpful overlaps between Regulated DMPs and IVAs and with both Protected Trust Deeds and Debt Arrangement Schemes (DAS) in Scotland. The regulatory arrangements envisaged by the Ministry of Justice would also overlap confusingly (and expensively) with those overseen by the OFT and the IS for licensed debt advisers and IPs respectively. If there is evidence to justify a scheme providing statutory relief from interest and other charges for debtors, who can repay their debt in full, the Scottish DAS should be looked at to see if it may provide a model for the rest of the UK;

Whether or not a Regulated DMP is introduced there is a strong case for more consistent regulation and monitoring of debt advice firms. The debt solutions market is dominated by a relatively small number of businesses, both commercial and not-for-profit, which offer statutory debt relief (IVAs and DROs) and informal debt solutions such as DMPs. The regulation of such firms is now split between the Insolvency Service and the insolvency regulators (which regulate the IPs employed by such firms as individuals) and the OFT which requires firms to hold consumer credit licenses for debt advice and regulates them as businesses. The OFT has only recently started pro-active monitoring of debt advice firms through Trading Standards Officers. In the long-term there may be a case for a joined-up system of regulation covering all debt advice firms and the key individuals in them. In the short-term the IS and the OFT (or whichever other body may be responsible for debt advice firms after the election) should cooperate more closely, exchange information and consider setting up joint monitoring visits and common standards for the frequency and methods of monitoring. The same arrangements for handling debtors’ complaints about bad advice should apply to all debt advisers, including IPs, as recommended in our last two annual reports; With a view to improving access to IVAs the IS should reintroduce their proposals for a Simplified IVA. We support the proposal in a recent consultation document issued by the IS to amend the Insolvency Act 1986
to make it possible for IPs to be licensed to act solely in personal insolvency procedures or solely in corporate procedures or both.

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