Full picture

Debt and
insolvency:
the full picture
April 2010 working with…
As personal insolvencies reach record levels,
research commissioned by R3 explores the profile
and experiences of individuals in each of the main
informal and formal insolvency solutions.
01 Introduction
01 Executive Summary
02 R3’s recommendations
03 Section 1:
Debt Management Plans (DMPs)
07 Section 2:
Individual Voluntary Arrangements (IVAs)
10 Section 3:
Bankruptcy
12 Section 4:
Debt Relief Orders (DROs)
12 Section 5:
Echoed themes and key differences
contents
Debt and insolvency: the full picture page 1 of 13
Insolvency in England and Wales: setting
the scene
A person is insolvent if they are unable to pay their debts as they
fall due. In the last few years, the number of individuals who
fall into formal insolvency in England and Wales has increased
to above 100,000 each year. According to Insolvency Service
records, there were 107,288 personal insolvencies in 2006;
and the number remained at a similar level in 2007 (106,645)
and 2008 (106,544). Personal insolvencies reached a record
high in 2009, at 133,266.
Insolvency experts at R3 predict that the impact of the
recession will continue for some time, with numbers not
dipping below 125,000 in 2010 and 2011. Evidence from
previous recessions lends weight to this assertion – figures
from the 1980s and 1990s recession indicate that insolvencies
usually continue to rise even after economic recovery begins.
This trend is colloquially known as the ‘insolvency lag’. Although
this recession exhibits its own character, the insolvency lag is
hard to avoid and the worst may be yet to come for financially
distressed individuals.
The official figures: only part of the picture
The Insolvency Service records the numbers of people in formal
insolvency procedures: Individual Voluntary Arrangements,
Debt Relief Orders and bankruptcy. Their figures do not
include the number of people in Debt Management Plans
(DMPs), which are believed to dwarf the numbers of people in
all formal insolvency procedures combined.
Lower estimates suggest that there are 300,000 individuals
in DMPs, and higher estimates put the number at over
700,0001. By way of comparison, there are around 130,000
people currently in an Individual Voluntary Arrangement, and
over 70,000 people who are currently undergoing bankruptcy
(undischarged bankrupts). The lack of centralised records
means that official insolvency figures do not show us the full
picture of insolvency in England and Wales.
Methodology note
Commissioned by R3, research agency ComRes surveyed
1,961 members of the public who describe themselves as
struggling with debt by online questionnaire, between 17
December 2009 and 7 January 2010. The sample is split into
five sections: 1,193 individuals are struggling with their debts,
but haven’t contacted anyone for help; 308 are struggling
with their debts and have contacted their creditors; 260 are
in a Debt Management Plan; 119 are in a Individual Voluntary
Arrangement; 66 are bankrupt; and 15 are in a Debt Relief
Order.
Executive Summary
Key findings from this research indicate that:
• Bankruptcy is the preserve of people in the most
excessive debt (averaging over £200,000); while IVAs
represent the ‘middle option’ (averaging around
£150,000); and DMPs are generally entered into
by those with the least amount of debt (averaging
£50,000 or less). Broadly this is a positive finding,
indicating that each insolvency procedure is
functioning fairly well in relation to one another,
avoiding duplication and occupying relatively distinct
territory.
Although they appear to be in much greater debt
than people in IVAs and DMPs, people undergoing
bankruptcy tend to have the lowest income. People
in IVAs tend to pay back more money each month
than people in a DMP, and tend to earn a little more.
DMPs IVAs Bankruptcy
Average
debt before
entering
procedure
Between
£10,000 and
£50,000
(mode)
£162,000
(mean)
£224,000
(mean)
Average
income per
month
£1,400 £1,540 £996
Average
amount paid
back each
month
£250 £347 N/A 2
The sample size of those in a DRO is not sufficient to produce averages
Introduction
As personal insolvencies reach the highest levels ever recorded, research commissioned by
R3 explores the profile and experiences of individuals in each of the main informal and formal
insolvency solutions: individuals in a Debt Management Plan (DMP), those in an Individual
Voluntary Arrangement (IVA), individuals who are undergoing bankruptcy (undischarged
bankrupts) and those in a Debt Relief Order (DRO).
1 http://www.justice.gov.uk/consultations/docs/debt-management-schemes.pdf
2 Bankruptcies can often involve an ‘income payment agreement’ but these are not
a universal feature of the procedure.
About R3
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.
Debt and insolvency: the full picture page 2 of 13
It is important to note that, due to the complexity
of asking respondents to differentiate between
secured and unsecured debt, the questions relating
to debt levels simply asked about their ‘total’ debts.
As such their responses may refer to both secured
and unsecured debt, or just unsecured debt – given
the high level of debt included in the responses, it is
likely that they were referring to both secured and
unsecured debts together.
• Debt write-off seems to be a key defining
characteristic of formal insolvency procedures,
while the chance to pay back debts in full is a key
characteristic of the informal option (DMP).
• The fear of bankruptcy, or the procedure’s seemingly
unappealing qualities/consequences, evidently plays
a major role in drawing individuals to IVAs and DMPs.
Despite certain press reports to the contrary, the
‘stigma’ or fear of bankruptcy appears to persist.
• Obtaining protection from creditors is a vitally
important factor in drawing financially distressed
individuals towards formal and informal insolvency
procedures. While this may be a key motivating
factor, the reality does not deliver on its promises –
in all of the formal and informal solutions explored in
this study, a significant proportion of individuals say
they continue to be contacted or even threatened by
their creditors.
• A significant minority of people in all of the formal and
informal insolvency procedures say they were not
talked through alternative options before they entered
into their procedure. It might be that individuals
have simply forgotten the advice they received
before entering into the insolvency procedure; it
may be that certain individuals’ financial situations
(such as extremely excessive debt in those who are
undergoing bankruptcy) means that other options
were unavailable and therefore not discussed; or it
might indicate that those who offer advice and/or
provide insolvency solutions are not making people
as aware of their options as they should be.
• A significant proportion of people in formal
insolvency procedures say they were previously in a
DMP, suggesting a ‘journey’ from informal insolvency
to formal insolvency in a considerable number of
cases.
• The vast majority of people in formal insolvency
procedures believe they will not need help with their
finances in the future.
R3’s recommendations
Informed by these research findings, R3
recommends that:
• Greater enforcement action should be taken against
creditors who continue to contact and threaten debtors
once they have entered into a formal insolvency
procedure.
• Organisations that offer formal or informal insolvency
procedures should be more transparent about the full
range of options available to debtors who approach
them.
• In certain situations in which a debtor feels in need of
protection from creditors, but has not yet made a decision
about which insolvency solution is best suited to them,
we believe they should be able to apply directly to the
Court for relief by an assured moratorium for up to 28
days. During that period, the individual should be obliged
to seek professional advice (from a licensed professional
or advisor), and then take a decision on which informal
or formal insolvency solution to pursue. This proposal is
designed to relieve individuals from creditor pressure,
creating an environment in which debtors can weigh up
the full range of options before making a decision, and
therefore increasing the likelihood that they pursue an
option best suited to their particular financial situation.
• Any agency, organisation or company offering advice
on formal or informal insolvency procedures should
be qualified and regulated to the same standard as
Insolvency Practitioners.
• The Government should keep records of the numbers of
people in a DMP to encourage a broader understanding
of the insolvency landscape in the UK, and facilitate greater
evidence-based policy making.
• Creditors’ should be prevented from changing the
conditions of DMPs once they are in place if they have
a detrimental effect on the debtor’s ability to pay back the
money owed.
• Greater consideration should be given to the introduction
of overall caps on the length of DMPs and restricted
access to DMPs so that people with excessive debt
(and little hope of paying the money back) are channelled
towards a more appropriate insolvency procedure.
• DMP providers should be obliged to verify proof of income
and expenditure before implementing a DMP to avoid the
emergence of plans that are unworkable from the start.
• DMP providers offering their services for a fee should be
obliged to make their fees clear from the outset of their
contact with a debtor.
Debt and insolvency: the full picture page 3 of 13
Section 1: Debt Management Plans (DMPs)
How did you hear about DMPs?
Did anyone talk to you about other ways of dealing
with your debts before you started your DMP?
• 39% of individuals in a DMP say they had heard about DMPs by seeing an advert about them;
• 28% say they contacted a charity or helpline who suggested it might be a good idea;
• 15% came across DMPs as a result of their creditors suggesting them; and
• 12% received a phone call from a company offering DMPs.
The majority (60%) of individuals in a DMP say they
had been talked through other options, like IVAs or
bankruptcy, before they started their DMP, but 35% say
this did not happen in their case.
1.1 What is a Debt Management Plan (DMP)?
A DMP is one of the range of solutions available to people struggling to pay their debts. Operating outside statutory insolvency
procedures, DMPs are a formalised – but not legally binding – agreement between an individual who is in financial difficulty and
their unsecured creditors. DMPs are usually negotiated and administered by a third party (either a private company or a not-forprofit
organisation).
As DMPs are not legally binding, their characteristics vary. They can include debt forgiveness, but often allow people to pay off
their debts in full by extending the repayment period. There is no limit on the amount of debt included in a DMP or the length of
time a DMP can last.
Individuals in a DMP make regular payments to the organisation that established and administers their DMP. The organisation
then distributes the money between the individual’s various creditors. If the organisation providing the DMP is a private company,
they will charge for this service.
1.2 Research findings
ComRes conducted an online survey of 260 people in a DMP. The following charts show their responses to the questions posed,
designed to generate an insight into the profile of people in DMPs as well as finding out more about their experiences of this
informal debt management procedure.
Debt and insolvency: the full picture page 4 of 13
Why did you go into a DMP?
Asked to select as many reasons as they would like to, the top three reasons given for entering a DMP are: ‘one payment was easier
than dealing with all of the people I owe money to separately’ (70%); I felt better because I didn’t have to deal with my creditors any
more (58%); and I wanted to pay back all of the money I owed’ (58%).
Avoidance of bankruptcy is a key reason for over half of people in a DMP (54%), while the belief that is was the most suitable option was
cited by 43%. 8% did not know there were any alternatives to a DMP while a small minority say they felt pushed either by their creditors
or the company setting up the plan.
Did the organisation that set the plan up ask for proof of how much
money you have coming in and going out each month?
How much debt were you in before your Debt Management Plan began?
The majority (78%) of people in a DMP say they were
asked for proof of income and expenditure before their
DMP was set up, but 22% say they were not asked for
this information.
The average amount of debt individuals are in when they
enter into a DMP is between £10,000 and £50,000.
Debt and insolvency: the full picture page 5 of 13
How long is your DMP due to last?
The average length of a DMP (mean) is about 8
years. A quarter (26%) are on a DMP lasting 10
years or more, while more than a third (37%) are
on plans lasting five years or less.
On average, individuals in a DMP pay back
approximately £250 each month.
On average, individuals in a DMP have a take-home
salary of around £1,400 a month; with the vast majority
of respondents (83%) saying that their income is £2000
or below, and a significant proportion (38%) on a takehome
income of £501 to £1000.
How much do you pay back each month through your DMP?
What is your monthly take-home income?
Debt and insolvency: the full picture page 6 of 13
Have any of these things happened after your plan began?
Almost half (44%) of individuals in a DMP say
they have been contacted by their creditors for
the money they owe since their DMP began and
more than a third 35% say their creditors have
threatened to take action to get their money
(such as saying they will take them to court or
send bailiffs round).
One in five (21%) say their monthly payments have increased, but 30% say they have decreased in size. 17% say the plan now lasts for
longer than it was originally due to, and 9% have seen interest rates on their debts increase.
Fee charging DMPs
Our research suggests that around half of people in a DMP pay a fee to the company that set up and administers their DMP.
The average amount of money individuals pay to the company is around £50 a month, and the average amount paid to the
company for setting up the DMP in the first place is around £430 (a one-off payment).
When asked at what stage they were informed that they would have to pay the company, 10% of individuals in a fee charging
DMP say they were not told that they would be paying a fee until after they had started their plan; and just under half (49%) were
told that a fee would be charged when they first had a conversation with the company.
Debt and insolvency: the full picture page 7 of 13
Section 2: Individual Voluntary Arrangements (IVAs)
Were you in a DMP before you started your Individual
Voluntary Arrangement (IVA)?
Did anyone talk to you about other ways of dealing with your debts
before you started your Individual Voluntary Agreement?
Almost a third (30%) of individuals in an IVA were in a
DMP before going into their IVA.
Two thirds of people in an IVA (65%) say they did
receive advice about alternative options before they
started their IVA, but 32% say this did not happen in
their case.
2.1 What is an IVA?
The IVA Standing Committee provides a useful definition of an IVA:
“Individual Voluntary Arrangements (IVAs) were established in 1986 as an alternative to bankruptcy, aimed at enabling individuals
who had assets or income (or both) to repay at least some of their debt, resulting in higher returns to creditors than bankruptcy.
“IVAs create a binding contract between debtors and creditors, enabling individuals to make manageable repayments over a
period of time, normally 5 years, without incurring further interest. An IVA proposal will be put to creditors and voted on. For a
proposal to be approved, at least 75% by value of the creditors have to vote in favour. Once approved, the proposal is supervised
by a licensed Insolvency Practitioner.”3
Individuals in an IVA make regular payments to the Insolvency Practitioner that administers their IVA, and they then distribute the
money between the individual’s various creditors.
2.2. Research findings
ComRes conducted an online survey of 119 people in an IVA. The following charts show their responses to the questions posed,
designed to generate an insight into the profile of people in IVAs as well as finding out more about their experiences of this formal
insolvency procedure.
3 Review of the impact of the IVA protocol A report produced by the Insolvency Service on behalf of the IVA Standing Committee. Published 21 December 2009
Debt and insolvency: the full picture page 8 of 13
Why did you go into an Individual Voluntary Arrangement?
Asked to select as many options as they would like to, people in an IVA are most likely to say that they didn’t want to go bankrupt
(70%) and that the IVA gave them a plan to deal with their debts (69%).
61% say they chose this option because they couldn’t pay back all the money they owed, 58% say a great advantage of an IVA was
that it stopped their creditors taking action against them. Advice seems to play a significant role, with 43% saying there were told it
was their best option.
One in five (20%) cite debt write off and interest freezes as key ‘pulls’ towards an IVA. A small minority (12%) say they were pushed into
it by the company that arranged their IVA and 4% say their creditors pushed them towards this option.
There is a spread of responses, but the average amount of
debt people have before entering an IVA is £162,000.
There is a spread of responses, but the average amount
paid back each month is £347.
The majority of people in an IVA (64%) say their IVA is due to last for five years, with 20% saying it will last less than five years.
When you started your IVA, how much debt were you in?
How much do you pay back each month?
How long is your IVA due to last?
Debt and insolvency: the full picture page 9 of 13
What is your monthly take-home income?
How confident are you that you will finish your plan?
The majority of people in an IVA (55%) take
home between £1000 to £2000 each month;
and the average income is £1,540.
87% of people in an IVA are fairly or very
confident that they will finish the IVA (55% are
very confident and 32% are fairly confident).
Just 13% are not confident they will finish their
IVA.
Have any of these things happened after your plan began?
After their IVA began, 25% say their creditors have contacted them for the money and 15% say their creditors have threatened to
take action against them.
17% say their monthly payments got bigger, while 18% say their payments got smaller. 17% say the IVA now lasts for a longer time.
A tiny minority say the interest rate increased, and a similar proportion say the company or practitioner arranging the IVA made late
payments to creditors.
77% of people in an IVA say they don’t think they’ll need help with their finances again, but 23% believe they may require help in the
future.
Do you think you’ll need help with your finances again in the future?
Debt and insolvency: the full picture page 10 of 13
Section 3: Bankruptcy
Were you in a Debt Management Plan before you became bankrupt?
Did anyone talk to you about a DMP or an IVA before you became bankrupt?
Almost a third (30%) of people who are currently
undergoing bankruptcy were in a DMP before becoming
bankrupt.
More than half of undischarged bankrupts (54%) say
they were talked through other options before becoming
bankrupt, but 43% say they were not.
ComRes conducted an online survey of 66 ‘undischarged bankrupts’. The following charts show their responses to the questions
posed, designed to generate an insight into the profile of undischarged bankrupts, as well as finding out more about their
experiences of this formal insolvency procedure.
3.1 Research findings
Why did you decide to make yourself bankrupt?
Of those who decided to make themselves bankrupt (selecting as many reasons as they wanted to), 61% say they couldn’t pay
back any of their debt and the same proportion say their debts were too big to think about paying them back over a longer period
of time.
53% say they wanted a fresh start, 53% said they was
told it was their best option and 46% say they wanted
to stop their creditors contacting them for the money.
14% and 7% were in an IVA and DMP, respectively.
Debt and insolvency: the full picture page 11 of 13
How much debt were you in before you became bankrupt?
What is your monthly take-home income?
Since you were made bankrupt, have any of your creditors contacted you?
The average amount of debt that undischarged bankrupts say they were in before going bankrupt is £224,000. The majority of
undischarged bankrupts (46%) say they were in between £10K and £50K debt before becoming bankrupt, and 21% say they had
accumulated more than £500,001 debt.
The average take-home income for undischarged bankrupts
is £996. Most undischarged bankrupts (40%) say their
monthly take-home income is between £500 to £1,000; 29%
say their income is less than £500 each month and 21% say
their monthly income is between £1001 to £2000.
44% of undischarged bankrupts have been contacted by
creditors since becoming bankrupt, while 56% have not
experienced this.
86% of undischarged bankrupts do not think they will need help with their finances in the future, while 14% think this might be
necessary in the future.
Do you think you’ll need help with your finances again in the future?
Debt and insolvency: the full picture page 12 of 13
Section 4: Debt Relief Orders (DROs)
4.1 What is a DRO?
Debt Relief Orders (DROs) are an alternative to bankruptcy for people with debts of less £15,000, assets of less than £300 and
surplus income of less than £50 per month. They are a relatively new insolvency procedure, having come into force in April 2009.
Essentially, they are very similar to bankruptcy, but designed for people who cannot afford to go bankrupt.
During the period in which the DRO is in place, those who have them are protected from creditor enforcement action and are
subject to similar restrictions to bankruptcy. DROs lead to debts being discharged after one year.
4.2 Research findings
ComRes conducted an online survey of 15 people currently in a DRO. The sample of people in a DRO is small, so results should
be treated as indicative rather than definitive.
The research found that:
• A minority of individuals in the DRO group say they were in a DMP beforehand.
• The group is fairly evenly split as to whether or not they were talked through other options before going into their DRO.
• The majority of individuals in the DRO group say they went into the DRO on the basis of advice, but other reasons include
wanting a fresh start, not having enough money to go bankrupt and obtaining protection from creditors.
• The majority of individuals in a DRO say they have been contacted by creditors since starting their DRO.
Section 5: Echoed themes and key differences
The purpose of this section is to compare and contrast the profile and experiences of people on the various formal and informal
insolvency procedures.
5.1 Financial comparison
Looking at the comparative situations of people in DMPs, IVAs and undergoing bankruptcy, it seems as though:
• Bankruptcy is generally the preserve of those who are in the most excessive debt (average £224,000), IVAs seem to represent
the middle option (average £162,000) and people in DMPs usually owe the least amount of money (between £10,000 and
£50,000 on average).
• Although they appear to be in much greater debt than people in IVAs and DMPs, people undergoing bankruptcy seem to have
the lowest income.
• Individuals in IVAs usually seem to pay back more money each month than those in a DMP, and tend to earn a little more.
DMPs IVAs Bankruptcy
Average debt before
entering procedure
Between £10,000 and
£50,000 (mode)
£162,000
(mean)
£224,000
(mean)
Average income per month £1,400 £1,540 £996
Average amount paid back
each month
£250 £347 N/A
5.2 Creditor contact
Obtaining protection from creditors is clearly a vitally important factor in drawing financially distressed individuals towards formal
and informal insolvency procedures. While this may be a key motivating factor, the reality does not always seem to deliver on its
promises: in all of the formal and informal solutions explored in this study, a significant proportion of individuals say they continue
to be contacted or even threatened by their creditors.
Debt and insolvency: the full picture page 13 of 13
5.3 Discussion of alternative options
A significant minority of individuals in all of the formal and informal insolvency procedures say they were not talked through
alternative options before they entered into their procedure. It might be that individuals have simply forgotten the advice they
received before entering into the insolvency procedure; it may be that certain individuals’ financial situations (such as extremely
excessive debt in those who are undergoing bankruptcy) means that other options were unavailable and therefore not discussed;
or it might indicate that those who offer advice and/or provide insolvency solutions are not making people as aware of their options
as they should be.
5.4 An insolvency ‘journey’
A significant proportion of people in formal insolvency procedures say they were previously in a DMP, suggesting a ‘journey’ from
informal insolvency to formal insolvency. For example, 30% of people in an IVA say they had previously been in a DMP, as do 30%
of undischarged bankrupts. This may suggest that the DMP was not the appropriate solution for the individuals concerned in the
first place (because it was incapable of returning them to solvency) or it could be that the individuals’ financial situation deteriorated
as a result of a life event, such as an unexpected loss of income, which hampered their ability to pay back their debts.
5.5 Debt write-off or paying back the full amount
Wanting to pay back the full amount of money owed appears to be a popular reason for entering into a DMP; while, conversely,
debt write-off seems to be a crucial reason for entering into the formal insolvency procedures. The top reason selected for
becoming bankrupt is because the level of debt is so great that it is cannot be paid back in full, and the third most popular reason
cited for going into an IVA is because the individuals concerned believe the debt is just too sizeable to pay back.
These results indicate that debt write-off is seen as a key defining characteristic of formal insolvency procedures, while the chance
to pay back debts in full is a key characteristic of the informal option (DMP).
5.6 Fear of bankruptcy
The fear of bankruptcy (or the procedure’s seemingly unappealing qualities/consequences) evidently plays a major role in drawing
individuals to IVAs and DMPs. ‘I didn’t want to go bankrupt’ is the top reason why people in an IVA say they decided to pursue
this option, and the forth most cited reason for why people in a DMP say they decided to enter into their plan. Despite certain
press reports to the contrary, the ‘stigma’ or fear of bankruptcy persists.
5.7 Future financial help
The vast majority of undischarged bankrupts and those in an IVA believe they will not need help with their finances in the future
(86% compared to 77%, respectively).
There are a number of possible explanations:
• It may be the result of overly-optimistic thinking;
• By entering into a formal insolvency procedure, the individuals may believe they have a fresh start ahead, with their financial
troubles behind them;
• It may be that they believe that the procedures’ impact on their credit rating is such that they will be simply unable to build up
excessive debt again;
• It could be that undergoing bankruptcy or going through an IVA involves a learning curve – a financial lesson learned.

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