An increase in personal insolvencies in the fourth quarter of last year saw total numbers in England and Wales hit 115,299. It’s the highest level since 2011 and the third consecutive year that the figure has gone up.
This upward trend is also being experienced by Leonard Curtis Business Solutions Group – providers of the Lifecycle accountancy network – and its LC Advisory personal insolvency specialists. They’re meeting with an increasing number of accountant members and their clients to guide them through the range of options available.
Demand for its services is high. Recent figures released by the Insolvency Service also show that in the last 12 months, 1 in 388 adults were subject to a formal insolvency procedure.
Experts blamed Brexit uncertainty, a weak growth in wages and tighter credit rules, which forced more people to declare themselves insolvent in the run-up to Christmas.
Individual Voluntary Arrangements are driving the increase
The increasing number of personal insolvencies is largely driven by Individual Voluntary Arrangements (IVAs), which have remained the most common process since 2011.
The number of bankruptcies has remained relatively stable in Q1 this year, with 3,357 being the result of the debtor's own petition and 831 from a creditor's petition.
Changes to the personal insolvency process
Following the Government’s overhaul of the Personal Insolvency framework in 2015, the court's involvement has been removed for people making themselves bankrupt.
Instead, it can now be done via an online portal with the costs being paid in instalments. The minimum amount a creditor must be owed to enable them to issue a bankruptcy petition also increased to £5,000 at this time.
It’s a complex, highly emotional process for the client and their accountant, so it’s recommended that expert advice is sought before a debtor takes any steps to determine the most suitable process.
INDIVIDUAL VOLUNTARY ARRANGEMENT (IVA) An Individual Voluntary Arrangement (IVA) is a legally binding agreement between a debtor and their creditors whereby a payment schedule is agreed to consolidate and settle their outstanding debts – either in full or a fixed percentage.
An IVA is designed to tailor a debtor’s individual needs and is based on their income and expenditure.
It can be a one-off payment, known as a lump sum IVA, and these funds are generally obtained from releasing equity in the debtor's matrimonial home or from third party sources. Alternatively, the debtor can propose a monthly payment IVA spread over a period of five years. The debtor would make affordable monthly payments to their IVA Supervisor, who would distribute it equally among the creditors.
Once agreed, the IVA cannot be altered by the individual – unless special circumstances dictate – and creditors should not contact the debtor or increase their claim. When the final payment is made to creditors, any remaining debts are written-off.
An IVA allows the individual to avoid bankruptcy and meets creditors' requirements through regular payments and a final recovery of a percentage of the total sum owed.
BANKRUPTCY Bankruptcy is a form of insolvency procedure available to the debtor if they cannot pay their existing debts or are unable to source sufficient finances to propose an IVA, either through a lump sum or monthly contributions.
Bankruptcy frees the debtor from overwhelming debts so they can make a fresh start, subject to certain restrictions, and ensures their assets are shared out fairly amongst creditors.
Anyone can be made bankrupt and the debtor can make themselves bankrupt. Alternatively, a bankruptcy order can be obtained by a creditor.
DEBT RELIEF ORDERS Debt relief orders (DROs) were introduced in 2009. They’re a form of debt relief available to those who have minimal assets, a debt of less than £20,000 and are on a low income.
There is no distribution to creditors and the debtor is discharged from his debts 12 months after the DRO is granted.
To find out more about how LC Advisory can support your clients who are experiencing personal financial difficulties, click here.