The Personal Insolvency Framework covers the process and practice of bankruptcies, Debt Relief Orders (DROs) and Individual Voluntary Arrangements (IVAs) as different routes that people can take to become debt free. Christians Against Poverty has helped over 20,000 people to become debt free since 2010, so naturally we have a lot to input into this review, from the experiences of our clients to the expertise of our staff.
There are a number of routes available to people going through personal insolvency, including bankruptcy, Debt Relief Orders (DRO) and Individual Voluntary Arrangements (IVAs). These routes all lead to someone becoming debt free, but have differing fees, eligibility criteria and steps. So, as you may expect, this is a multi-stage and multi-pronged review to enable the Insolvency Service to get a rounded understanding of the current situation and the potential further changes that may be needed. As a result, we have published reports, offered feedback in roundtable discussions and submitted an official response to their call for evidence which you can read here.
So what is CAP’s view?
First and foremost, we welcome the review as an important step to updating and improving the personal insolvency options available in England and Wales (arrangements in Northern Ireland will be looked at after this review is completed and the options in Scotland are being reviewed separately). Each year, personal insolvency provides thousands of people with hope and a way out of debt which they would otherwise be unable to resolve. CAP is keen to support the evolution and improvement of the framework and options available.
Based on the insights gathered over the past 26 years of providing debt support, CAP has concerns about the accessibility, suitability and sustainability of the current framework. Breaking it down to the specifics, here are our top four changes we want to see: information, cost, options available, and barriers that exist after someone becomes debt free.
From information gathered through the experiences of CAP clients and staff delivering CAP services in local communities, we have identified issues with the understanding that people have about personal insolvency. The first and potentially hardest part to tackle is the stigma that surrounds it. This means that rather than being informed by reliable information, people’s views of what options are available may be altered by stigma, stereotypes and prejudgments that they or others around them have.
To make matters worse, the lack of regulation in the Individual Voluntary Arrangement (IVA) sector means that paid advertisements from large IVA provider firms may send people down a single track without independent advice about the range of options available to them.
The cost of applying for a personal insolvency option is currently a barrier for many people, preventing them from being able to access the solution they need. The fee to apply for bankruptcy is £680 per person, so a couple could be required to pay £1,360 upfront to access debt relief. Removing or means-testing this financial barrier for people on a low income would make a huge difference in making personal insolvency more accessible for those who need this route to become debt free.
3. Options available
To understand the experiences and views of advisors across the free debt advice sector, CAP was involved in conducting a joint survey alongside other debt advice charities, looking at the current insolvency framework and options. The responses from over 550 advisors from across the debt advice sector, revealed some concerning findings about the current options available. One of the results was that, currently, less than three in ten advisors (27%) think it is easy for someone to transfer to another debt solution where their initial solution fails.
The rigidity of the current eligibility criteria is a barrier that prevents people from moving between the different personal insolvency solutions as their circumstances change or new information comes to light during the insolvency process. This restricts people’s ability to access the most suitable debt solution for their circumstances. So what can be done to address this? Enabling the debt advice sector to have increased autonomy over the options that they recommend for clients, and making the process of transferring between options easier, would enable the sector to better serve the needs of their clients.
In addition, the system needs to be altered to enable clients to have more certainty upfront on how their assets will be treated, especially the treatment of vehicles and family homes. This would support the advice process and allow clients to make an informed decision about which debt solution is best for them.
4. Barriers beyond ‘debt free’
In theory, personal insolvency aims to provide a ‘fresh start’ for people when they become debt free, but as it stands, market, societal and financial barriers remain beyond people’s journey through a personal insolvency option.
CAP is seeing an increasing number of clients who leave the personal insolvency process with broken budgets. Of the 4,468 client cases who have received debt advice and had their budgets reviewed and evaluated by CAP from 1 January 2022 until October, 51% have unsustainable budgets. People with broken budgets or those on unsustainably low incomes are unable to truly experience a fresh start. They remain trapped in poverty and start to amass debt again, despite reaching a point where they are debt free through the use of a personal insolvency option.
To add further restrictions to people’s tight budgets, our society as it stands is based heavily on credit scores. As a result, even when someone has gone through a personal insolvency process, they will not receive a ‘fresh start’ in practice due to the consequences that this will have. For six years it could affect their ability to secure a tenancy from a private landlord, get a good mortgage rate to buy a house, or pay monthly installments for car insurance premiums that they cannot afford to pay upfront annually.
And on top of all of the above is the use of a public record of people’s personal insolvency process. Currently, people who go through different personal insolvency options are listed on a publicly available list which includes the person’s full name, date of birth and which type of personal insolvency they went through. This has led to some not being accepted for jobs, or being unable to get social housing as a result of this practice. This results in ongoing worry which continues after the supposed ‘fresh start’.
What this means going forward
Our list of concerns and areas for improvement can go on (and indeed does for 45 pages in our written response), but the fact remains that CAP sees the value in helping people to become debt free. Insolvency options are vital for this, however, as it currently stands, there are improvements that need to be made. From suggestions of minor tweaks to major changes, CAP hopes to inform the review and help ensure the framework is as inclusive, suitable and sustainable as possible going forward.
As CAP found earlier this year through a poll commissioned through YouGov of over 2,000 adults in the UK, nearly a fifth (17%) of UK adults have used credit cards, overdrafts or loans to cope with rising costs, with 4.2 million people also turning to friends and family to borrow money. As a result, we are anticipating an increased need for and demand on the debt advice sector in the future. We wait with bated breath to see what changes are taken forward off the back of this timely review and we look forward to updating you of the impacts of this when they come to fruition.