Personal debt and insolvency:
fit for purpose?
1. Finding the right solution
– breathing space from creditors
The current personal insolvency system can appear
complex, with many different formal and informal
options to suit a range of circumstances. Given the
complexity of the system, it is vital that financially
distressed individuals enter the insolvency solution
best suited to their financial circumstances.
However, evidence suggests that individuals in financial distress
are not as aware of their options as they should be and that
they can receive bad advice or make pressurised decisions,
which results in them entering into the ‘wrong’ solution.
• R3’s research indicates that 35% of individuals in a Debt
Management Plan (DMP) said they were not told about other
ways of dealing with their debts before their DMP began.
• 32% of those in an Individual Voluntary Arrangement (IVA)
said that no-one talked to them about other options before
their IVA started.
• More than one in ten individuals in an IVA (12%) say they
were pushed into the arrangement by the company that
arranged their IVA.
• 30% of individuals in an IVA and the same proportion of
undischarged bankrupts were in a DMP before entering
into formal insolvency. This ‘journey’ between insolvency
procedures suggests that another solution may have been
more appropriate from the start.
While there is merit in having a number of debt solutions to suit
a range of circumstances, individuals should be able to take a
decision about which debt remedy to pursue based on impartial
and full advice; and in an environment that allows them to weigh
up the full range of options before making a decision.
R3 believes that individuals in financial distress should be
able to apply to court for a moratorium (breathing space) from
creditor action for twenty eight days, during which time they
are required to seek advice from impartial financial advisors
who do not have an interest in promoting a particular solution.
The creation of a moratorium should ensure that debtors
are made aware of their options and that they do not make
pressurised decisions – therefore increasing the likelihood that
they enter the insolvency solution best suited to their financial
situation and best able to resolve their debt problems.
There are a number of options to cover the costs of setting up
this initiative and running it, including a modest fee paid by the
debtor, a creditor levy, or a levy on credit cards.
2. Rebalancing the debtor-creditor
The personal insolvency regime should balance the
interests of creditors and debtors. In some areas,
the balance between creditor and debtor has shifted
towards the creditor. It is important that attempts are
made to rebalance this inequality.
We believe that monetary limits are currently misused by
creditors, allowing creditors to threaten to petition for an
individual’s bankruptcy on a relatively low level debt. Under
the current system, a creditor can petition for an individual’s
bankruptcy when they are owed just £750. We believe that
this threshold is now outdated, given that it was set in 1986.
We suggest that £3000 is a more appropriate sum. Raising
the threshold would prevent bankruptcy petitions being made
on very low level debts.
We also believe creditors should be required to obtain a
judgment before they issue a statutory demand. This would
prevent creditors using the threat of a bankruptcy petition as
an intimidating tactic rather than a genuine means to recoup
money owed to them.
3. Encouraging repayment of
The UK’s personal insolvency regime was designed to deal
with trading related insolvencies (company directors or self
employed individuals entering insolvency as a knock on
effect of business failure). It tends to encourage debt write
off with a view to encouraging business men and women to
pick themselves up and begin again as quickly as possible.
However, 90% of personal insolvency cases involve
consumer debt. In view of this, the personal
insolvency regime needs to be modified and
updated to encourage repayment of debts
wherever possible. R3 calls for two key
changes to address these issues:
A simple route to repayment for
A protocol compliant IVA is a very effective
repayment procedure for insolvent individuals
who have sufficient income or assets to repay
Over recent years, there has been a dramatic increase in the number of people struggling with their
debts. As a consequence, England and Wales has experienced a personal insolvency explosion, with the
number of people entering formal insolvency increasing by 450% over the last decade.
Given the scale of the problem, it is vital that the personal insolvency system is effective and strikes the
right balance between dealing with individuals in financial distress, and protecting the rights of creditors.
R3 believes that four key areas should be reformed to ensure the insolvency regime supports individuals
in financial distress more effectively and encourages repayment of debts wherever possible.
some or all of what they owe. Despite high take-up, there are
still many barriers to entry into this type of IVA, with creditors
rejecting IVA proposals or modifying them to the point where
they are unacceptable to the debtor.
We believe that these simpler consumer cases – where debts
are easily quantifiable, and there are no tax liabilities – should
be able to access a statutory solution to resolve their distress
– the Simplified IVA.(SIVA) By reducing the scope for creditor
modification or outright rejection, SIVAs would increase the
opportunity for individuals who can repay their debts to do so.
Previously judged by the Government to be unnecessary, this
statutory process would ensure that there is a simple repayment
solution available to the majority of insolvent consumers.
Many claim that bankruptcy has become ‘too easy’ compared to
other repayment insolvency solutions – providing an opportunity to be
free from debts after a short period of time (individuals are discharged
after 12 months, and some are discharged before this point).
To incentivise repayment, R3 believes there is merit in considering
returning the period of bankruptcy from one year to three years.
The 2002 Enterprise Act decreased the bankruptcy period to one
year, with the hope of promoting enterprise. This was misconceived
given that the vast majority of bankrupts are domestic, consumer
bankrupts. Lengthening the bankruptcy period would incentivise
repayment by effectively serving to make bankruptcy less
appealing than repayment options (IVAs, DMPs).
We also propose that individuals entering an IVA should no longer
be subject to the same negative impact on their credit rating as
those individuals entering bankruptcy. This would recognise the
key differences between the procedures – i.e. that individuals in
an IVA make a long and concerted effort to repay their debts
whereas bankruptcy involves considerable debt write off.
4. Debt Management Plans:
Debt Management Plans have an important role to play in the
debt and insolvency landscape. However, there remain worrying
practices in the debt management market, as evidenced by an
OFT report and the findings of R3’s research:
• Research among Insolvency Practitioners find that 57% have
seen individuals whose DMP had failed because the amount
of debt they were in was simply too high to make a DMP a
feasible option in the first place and 46% have seen DMPs fail
because the monthly payments set up as part of the plan were
• Research among individuals in DMPs also suggests that there
is bad practice within the DMP industry. For example, 22% of
individuals in a DMP say the organisation that set it up did not
ask for proof of income and expenditure before the plan began
and 10% of individuals in a fee-charging DMP say they were not
told that they would be charged until after their plan began.
Unlike other insolvency procedures, DMPs are not regulated by
the Insolvency Service. Instead the OFT issues Consumer Credit
Licences and debt management guidance. R3 believes that the
OFT’s regulation and enforcement activity is insufficient to tackle
bad practice within the market, mainly because the bulk of the
investigative work is reactive rather than proactive. DMP providers
are not regularly monitored and once a Consumer Credit Licence
has been granted there is little to deter bad practice.
We think it is undesirable that while IPs are subject to rigorous
ongoing regulatory and compliance requirements in order to
practice within the personal insolvency market, the regulation
of DMP providers and the unregulated debt advice market is far
less stringent, even though both deal with individuals in financial
distress and the provision of insolvency solutions.
R3 calls for DMP providers to be regulated to the same standards
as Insolvency Practitioners and believe that the regulation of
this market should be removed from the OFT and become
the responsibility of the Insolvency Service. This would ensure
that all insolvency solution providers are regulated to the same
standards and deter bad practice within the industry.
Key insolvency terms
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a formal
agreement between debtors and their creditors. Both parties
come to an arrangement whereby debtors make payments
towards the total amount of their debt to pay off a percentage
of what they owe. Usually after 5 years the debt is settled
and the remainder written off. Due to its formal nature, an
Individual Voluntary Arrangement (IVA) has to be supervised
by a licensed insolvency professional.
What is a DMP?
A Debt Management Plan (DMP) is an informal agreement
between debtors and their creditors. Both parties come to an
arrangement whereby debtors make repayments towards the
amount of debt they owe over an agreed period of time (there
is no set limit). DMPs may or may not involve debt write off,
dependent on what is agreed between the debtor and creditors.
DMPs can be set up by licensed insolvency professionals, feecharging
DMP companies or not-for-profit agencies.
What is bankruptcy?
Bankruptcy is a formal court procedure which can be started
by the individual concerned or by certain of
their creditors. The debtor’s assets will
be sold to help pay creditors, however
they will usually be allowed to keep
their personal belongings such as
the contents of their home. The
debtor’s assets will be dealt with
by a licensed and regulated
Insolvency Practitioner or by a
government official and some
repayments may be made over
a set period of time (up to 3
years) if there is sufficient income
to do so. Bankruptcy usually lasts
for 12 months. Once the debtor
has been freed from bankruptcy, with
certain exceptions they are released from
R3, the trade body for Insolvency Professionals,
represents over 97% of Insolvency Practitioners. R3
members are trained and regulated accountants and
lawyers who have extensive experience of helping
businesses and individuals in financial distress.
Personal debt and insolvency: