Figures published today by the Insolvency Service show that company liquidations in England and Wales in the first quarter of this year were up 4.8% on the previous quarter and up 4.9% on the same quarter in 2013. Similarly, personal insolvencies increased in the first quarter to 24,931 but were still lower than the same period 12 months ago.
Bev Budsworth, managing director of The Debt Advisor commented: “Today’s figures show that overall personal insolvencies have increased but are still less than they were 12 months ago and have still seen a reduction of about a quarter from around 135,000 in 2010.”
“Corporate insolvency is also slightly higher in this quarter, however, the Insolvency Service puts this down to an unusually low number of compulsory liquidations in the last quarter and has said that figures have been ‘fairly stable’ since 2012.”
“Following the introduction of the ‘bankruptcy lite’ solution in 2009 – the Debt Relief Order (DRO), the numbers of DROs and bankruptcies collectively increased to a worrying high of 85,000 in 2010. Since then the numbers of bankruptcies and DROs combined have steadily declined to just over 52,000 in 2013, primarily driven by the reduction of bankruptcy numbers. This quarter has also seen a decline in DRO numbers from just over 7,200 at the start of 2013 to 6,459 today,” explained Bev.
She added: “There is no doubt that the decline in bankruptcies is due largely to the high cost of making oneself bankrupt – a fee of £700 which could take debtors many months to save up. Even though there are numerous licensed intermediaries to help with drafting petitions for both DROs and bankruptcies, the process is still complex and daunting and therefore many debtors opt for procedures which are easier to access and set up.
“It’s not surprising that Individual Voluntary Arrangements (IVAs) are up slightly as these are by far the most sought after option for people in serious debt. IVAs have been around for years and have consistently been proven to work well for both individuals in debt and their creditors. Figures over the last three years have shown that IVAs have remained steady at around 49,000 per year.”
“However, today’s figures are not the full story as they do not include informal debt management plans – something that is set to change following the government shake up of financial services. From April, the Financial Conduct Authority (FCA) will assume responsibility for the regulation of debt advice and debt management solutions from the Office of Fair Trading. As well as tougher regulation, the FCA will be monitoring how effective debt management plans are at getting debtors free from debt. Practices who wish to continue to administer debt solutions will also have to prove that their own business is in good financial order and that treating customers fairly is at the heart of everything they do.”
“We welcome this additional regulation and the added ‘teeth’ that the FCA will have and believe that this level of government commitment can only help consumers further. However, I would like to see the FCA continue to support the Protocol Compliant Debt Management Plan (P-DMP) which incorporates obligations for creditors not to ‘behave badly’ by threatening action to obtain higher payments.”
Bev concluded: “Everyone with debt problems should have access to good quality debt advice regardless of whether this is from the ‘paid-for’ or ‘free’ advice sectors. Fees need to be fair and reasonable but it’s equally important that debtors get access to proper advice that is fully understood and is properly regulated.”
WHAT IS A DRO AND HOW DOES THIS COMPARE WITH BANKRUPTCY? HOW CAN AN IVA OFFER A BETTER DEAL FOR ME OR MY CREDITORS THAN BOTH OF THESE?
The information below provides a brief synopsis of the different procedures.
What is a DRO?
A Debt Relief Order (DRO) is otherwise known as the “bankruptcy-lite” procedure and is aimed at individual with little or no assets or surplus income and debts under £15,000.
The criteria for a DRO Includes:
- Be unable to repay your debts
- Your debts must not exceed £15,000
- Your total gross assets must not exceed £300 in value but you can own a car worth no more than £1,000
- Your disposable income must not be more than £50 a month
- You cannot have been subject to a DRO in the past 6 years
- You must reside in England or Wales (or you have done in the past 3 years)
- You must not currently be the subject of another formal insolvency arrangement
The cost of a DRO is £90 which is payable to the Official Receiver before your application is processed. You can only apply through a skilled debt advisor known as a “licensed intermediary” such as CAB who can help you draft your DRO paperwork.
You have to make sure that your information is correct at the time you apply. If not your application for a DRO can be rejected or you could have your DRO cancelled or action can be taken against you.
Your application is then vetted by The Official Receiver who can accept, reject or ask for further information. If your DRO is approved, your creditors will be notified. Following approval of your DRO there is a moratorium period of 12 months during which creditors cannot take any action against. If your circumstances do not change in the 12 month period ie your net surplus does not increase above £50, etc your debts are written off after the expiry of the moratorium.
What is a Bankruptcy?
Bankruptcy is one way of dealing with debts you cannot pay. Becoming bankrupt is a very difficult decision and it should only be taken as a last resort. The bankruptcy proceedings can:
- free you from overwhelming debts so you can make a fresh start, subject to some restrictions, and
- make sure your assets are shared out fairly among your creditors.
Once you are made bankrupt you have a duty to provide information to the official receiver and the trustee, and attend their office as and when required.
Discharge from bankruptcy is usually 12 months after the order but if you fail to co-operate with your Trustee – the automatic discharge can be suspended indefinitely. During bankruptcy you will face a number of restrictions including not being able to act as a director of a limited company and also not being able to obtain credit of more than £500 without disclosing that you are undischarged bankrupt.
Even though the discharge is 12 months, if you have surplus net income, your Trustee will ask for income contributions for 3 years.
The normal term for a bankruptcy is 12 months. During this time you will face a number of restrictions. Any changes in your circumstances must be reported to the official receiver.
If you have a property, any equity in the property which belongs to you will have to be realised during the period of your bankruptcy. The Trustee has a duty to see if any family are available to able to buy your share of equity. If this is not possible, the Trustee, who only has 3 years from the date of bankruptcy to get in your share of equity, will look to secure his interest in the property by obtaining a charge against the property and/or apply to court for a possession order.
Bankruptcy does have a sting in the tail!! If you are found to have racked up debts knowing you could not pay for them, or your debts are the result of gambling or fraud, you could face action to obtain a bankruptcy restriction order “BRO” against you which could last up to 15 years.
All bankruptcies, DRO’s and IVA’s are entered onto a searchable register.
A bankruptcy is often considered a last resort and it is recommended that you first look into other insolvency solutions such as Debt Management or an Individual Voluntary Arrangement (IVA).
Individual Voluntary Arrangement (IVA)
An IVA is a legally binding arrangement with your creditors which allows you to repay your debts in affordable monthly payments over a fixed period of time, usually five years. An IVA can only be put forward for you by a licensed Insolvency Practitioner “IP”. The IP has a duty care to ensure they properly advise you on all your options. If you decide an IVA is appropriate, then your IP will become your Nominee and will help you put together your proposals to creditors.
Your proposals need to include all details of your assets and debts plus details of your income and expenditure. IVA’s are generally a payment plan over 5 years. However, an IVA can be tailored to suit your circumstances. So if you have no surplus income and little in the way of assets or equity in your property, it is possible to offer a “full and final settlement” to creditors which could be a 3rd party lump sum to settle your debts.
The proposals are sent to your creditors so they can consider your offer. A meeting of creditors is held (creditors very rarely attend) and creditors get to vote on whether they wish to approve your IVA proposals.
If your assets are at risk because of action taken by creditors, your Nominee we can apply to court for an Interim Order. This means that creditors cannot commence or continue with any action against you and your assets unless the court permits them to do so.
A meeting is then held with your creditors where they are able to vote on whether to accept, alter or reject your proposals – 75% of creditors must agree to the proposal in order for the IVA to go-ahead. As long as your proposal demonstrates a genuine desire to repay as much of your debt as you can afford, it is likely that creditors will accept your IVA. It is your Nominee’s duty to guide you on what creditors will find acceptable.
Once your IVA is approved all interest and charges on your unsecured debt is frozen. If creditors accept that you can only repay a proportion of your debt, the balance of your debt will be written off as long as you keep to the terms of your agreement.