Individual voluntary arrangements (IVAs) have remained reasonably consistent at 7,000 a month, reinforcing the procedure as the debtor’s insolvency process of choice. But the official statistics fail to tell the full story.
Although debt management plans (DMPs) can be useful procedures to ring-fence debt to accommodate a short financial shock such as redundancy, it is not a long-term solution if individuals are carrying unmanageable levels of debt, when at best it will simply maintain the status quo and at worst result in individuals falling deeper into debt.
In such situations, debt management simply masks the problem and renders lenders and borrowers in financial limbo with no timely resolution in sight.
As a DMP is an informal arrangement, the numbers are unknown but are suspected to dwarf all other statistics.
Moreover, the UK personal insolvency regime has seen changes over the past 12 months.
June 2021 saw the maximum liability threshold for DROs increase to £30,000, and May 2021 saw the introduction of the Debt Respite Scheme (more commonly known as Breathing Space), an online process that allows individuals to apply for a period of grace of up to 60 days whereby no enforcement action can be taken (subject to a creditor’s right to appeal to the debtor’s advisor or potentially the court).
In 2019, the government’s impact assessment on the consideration of their Breathing Space proposals estimated that there were 9mn over-indebted people in the UK, and debt charity Step Change has since estimated that the number of struggling individuals has doubled over the duration of the pandemic, with a worrying number of people using one form of credit to pay for another.
The impact of social stigma and other anxieties is that all too often people delay seeking help for their financial difficulties, which often only exacerbates the situation in the form of increased debt levels or increased severity of collection activities.
Both changes signal a recognition that accessibility for what many consider is 'low-level debt' needed to be widened, and help for those experiencing creditor pressure should be formalised.
In reality, creditors are generally sympathetic towards debtors who want to pay but cannot and seek a short respite or want to renegotiate terms.
The issue is with those debtors who can pay but simply do not want to as it may involve tough choices such as downsizing or removing children from private education.
Those debtors will eventually find themselves staring down the barrel of a bankruptcy petition. Yet, sometimes, bankruptcy should be embraced rather than avoided.
Every case is obviously different but, in general terms, if a debtor has no assets and no prospect of repaying liabilities, then bankruptcy can provide an effective insolvency solution, with discharge after 12 months bringing release from the liabilities and an opportunity to regroup and rebuild.
