Lynn Marshall from our Turnaround & Insolvency team talks through the discussion document produced by R3 in respect of suggested options on the way forward for formal personal insolvency options.
Click here to read the full document which sets out the current position and suggested options being put forward by R3 to government to improve the personal insolvency situation, including an option to have a three tier bankruptcy term.
I have over 24 years’ experience of dealing with personal insolvency under both the existing and previous bankruptcy regimes.
I wasn’t in favour of the bankruptcy period being reduced from three years to one, and 10 years later still think that the one year period impacts unfairly on the creditors. Bankruptcy should be a balance between the needs of the debtor and those of the creditors, but currently this is lacking.
Creditors need to feel that the bankrupt has served a penance and that the circumstances of the bankruptcy are taken into account. For example, cases where someone has accumulated debts with no thoughts as to how to repay should have a longer bankruptcy period than a person who has become bankrupt due to unforeseen circumstances such as job loss or illness. The suggestion of having a three tier system is reflective of this.
There are caveats to this including who decides the duration of the bankruptcy; who has input into this decision; and who bears the cost?
While the likely decision maker would be the Insolvency Service, this still poses questions due to them having had a reduction in their most experienced staff as a result of cost cutting measures, therefore how would they deal with the decision making process, and would a bankrupt be able to appeal against a decision?
Alternatively there is the option of the creditors being decision maker as it is them who has lost money, although there is the question of their ability to make an unbiased decision.
This debate will no doubt throw up a whole host of further issues which will need to be explored if this is to be progressed.
Individual Voluntary Arrangements
A consideration with Individual Voluntary Arrangements (IVA’s) is the impact on a credit rating compared to alternate options. I frequently get asked this and at present there is no difference between an IVA and bankruptcy on an individual’s credit rating.
People often state they want to repay creditors and don’t want the stigma associated with bankruptcy. However after hearing the length of an IVA and that there is no benefit to their credit rating on completion, individuals often reject the IVA as an option. It could be argued that if an IVA is successful it should immediately improve the individuals’ credit rating. This would encourage more people to consider the process as a viable option, therefore ultimately benefitting creditors as they would see a higher financial return.
This article has only touched on a couple of the discussion points included within the R3 paper and there are many more detailed therein. This is something which will be subject to stringent debate and should anyone wish to discuss please feel free to contact me on 0191 285 0321 or email firstname.lastname@example.org.