Managing Borrowing and Dealing with Debt
The IPC in its response re-stated that it is a public interest body set up in 1999 by the insolvency regulators and the Insolvency Service to keep under review and, where it thinks necessary, make recommendations on the ethics and professional standards of IPs and their enforcement. It was also pointed out that the IPC’s remit and knowledge is limited to insolvency, including personal over-indebtedness, and so it will only address the personal insolvency review part of the call for evidence.
The IPC expressed the following opinions in answer to the questions:
The role of the court
In favour of minimizing the role of the courts as a forum for dealing with personal debt problems. The IPC pointed to considerable anecdotal evidence that the involvement of the courts in dealing with statutory debt relief procedures such as bankruptcy and IVAs tends to increase both costs and delays.
Early support to debtors
Government should focus its efforts on improving the information available to debtors and the quality and consistency of advice given from the whole advice sector.
Information should be publicly available about the effectiveness and relative costs of different types of debt solutions, particularly Debt Management Plans (DMPs) and loan consolidation. This may currently be collected by creditors, creditors’ agents and debt advisers for their own purposes.
Balance between needs of debtors and rights of creditors
An upper limit of, say, 10 years should be imposed on the maximum duration of any personal debt solution whether informal or statutory. Also some debtors in bankruptcy may be able to make repayments for more than 3 years.
More generally, the major imbalance in the handling of personal indebtedness problems is the large asymmetry in knowledge and understanding between creditors, creditors' agents and debt advisers on the one hand and the debtors on the other.
The current range of debt solutions
Too many debtors are being advised to enter a commercially managed DMP when bankruptcy or an IVA may be a more appropriate solution for them. Also some debtors who have sufficient surplus income are being turned down for an IVA because regidites in the fee structure imposed by the creditors make the arrangement unprofitable for the IP, even in cases where the return to creditors would better than bankruptcy.
The government should, as a minimum, require all debt advice firms to produce regular annual statistics for wider publication showing the average duration and completion/failure rates of IVAs, DMPs and possibly consolidation loans (the IS now publishes annual aggregate figures for IVAs).
The £15,000 ceiling on debts which can be written off through a Debt Relief Order (DRO) should be raised to, say, a maximum of £30,000.
Whether or not a regulated DMP is introduced, debtors should retain the option of arranging an informal DMP with their creditors if they want to avoid a statutory debt solution.
Debt advice firms, including IPs, should be required or encouraged to use the same income and expenditure categories and expenditure allownaces to determine debtors’ surplus income and, if possible, to use the same criteria/algorithms to assess debtors’ eligibilty for different debt solutions.
Stricter and more frequent monitoring of advice given to debtors and the subsequent management of their cases by debt advice firms should take place. Joint monitoring visits by the OFT and the RPBs could be considered for firms offering both IVAs and informal debt solutions. Visits could be triggered by complaints or excessive failure rates.
Debtors changing circumstances
There should be evidence available on what happens to debtors when their IVA or DMP fails and what, if any, advice is given to them. It is known that the failure rates of IVAs is around 25% which deserves further investigation either through a special survey of debtors petitioning for bankruptcy and/or requiring IPs to report on what further action has been taken.
Debt relief and write-off
Too many debtors are being put into DMPs which provide them with little or only temporary (and insecure) debt relief.
Write-off requirements for DMPs may be too lax compared with those in bankruptcy and IVAs. Auditors, under both the accounting and the Basel insolvency rules, are required to write off debts covered by bankruptcy or IVAs but greater discretion is given in relation to informal debt solutions.
It is not considered to be appropriate to give an additional 28 days moratorium on top of the courts’ current 28 day grace period (which some debtors might use to dispose of assets). However, creditors might be required to advise debtors to then seek independent advice when they make their statutory demands.
Debtors in the “wrong” solution
There is evidence that some debt advisers may put debtors into a DMP for a “trial period” before transferring them to an IVA. If this is designed to earn debt advisers two sets of fees, it is highly questionable. The OFT has also criticised this practice, together with a general lack of transparency, mis-selling and poor management of DMPs and in some cases IVAs.
The main impact of debt solutions failing will fall on the debtor who, unless advised/helped to go into bankruptcy, is likely to stay in a state of limbo and under harassment by creditors for an indeterminate period. There appears to be little evidence on what happens to debtors whose solutions fail.
The “right” solution
Many debtors are eligible for a DMP, an IVA or bankruptcy. The choice will often depend on what the debtor feels most comfortable with. If a debtor who has enough surplus income to enter an IVA and wants to avoid bankruptcy, it would be wrong for the debt adviser to suggest that bankruptcy is the best solution. However, if the creditors press for a higher level of contribution than the adviser thinks that the debtor can reasonably make, the adviser should ask the debtor to think again. The same is true of DMPs.
In addition, some debtors may often not be in a sufficient state to decide upon the best solution for them given the apparently high incidence of mental health problems among debtors.
Investigation and enforcement action
No changes are suggested to current procedures.
The main aim of investigations and any subsequent restrictions must be to promote and maintain the confidence of creditors and the general public that illegal or reckless behaviour by debtors will be found out and proportionately penalised. Delaying a debtor’s discharge from his/her liabilities may be a necessary safeguard if restrictions on future conduct do not work.
A single “gatekeeper” is not considered feasible as there does not appear to be any organisation available with the necessary objectivity, skills or capacity to carry out this role.
The best approach would seem to be to introduce measures to require all debt advice firms to use a common approach to determining which debt solution(s) are appropriate for individual debtors and to encourage publicly available completion and failure rates of such solutions.
The not-for-profit sector is already struggling to cope with existing demand and is unlikely to have the resources to deal with the much higher level of demand which would be generated by a “gatekeeper” concept; nor would it have the necessary expertise.
The OFT’s report on the compliance of debt advice firms with its guidance confirms the IPC’s view that commercial debt advisers, including IPs, may be too influenced by what is in their financial interests (to at least cover their costs) to provide the wholly independent advice required in all cases which would be expected of a single “gatekeeper”.