The UK Personal Insolvency Framework – is it fit for purpose?

The Insolvency Service recently undertook a review of the current personal insolvency framework, seeking views on costs, the effectiveness, and the purpose of current procedures.

The government’s summary of responses illustrated that procedures certainly need to reflect advances in the way society now operates and the changing attitudes towards personal financial difficulty over the last 40 years.

Respondents felt that large numbers of people are not able to deal with their debts owing to:

• Barriers to entry are too high.
• Shortcomings in current procedures.
• Inconsistencies in the treatment of individuals.
• The quality of service provided.

Under the current regime, ineffective options to deal with debt may have increasingly detrimental ramifications on society, decreasing general mental health and well-being for many, and a negative impact on the welfare system, NHS resources, and the economy as a whole.

Procedures to deal with debt should offer a fair, fresh start to those in financial difficulty, with an equal focus on an orderly repayment to creditors where possible, striking a balance between the two.

The current procedures (Breathing Space, Debt Relief Orders, Bankruptcy, and Individual Voluntary Arrangements) received mixed views. Modernising the current framework could result in a single gateway to enable people to access independent, regulated debt advice, via a digital platform, or dovetailed with the current Breathing Space scheme.

The summary of responses leans towards the need for some reform, with new proposals expected to be forthcoming in 2024.

Matt Carter, National Bankruptcy Partner, commented:

“This review has come at a crucial time, with the cost-of-living crisis and the general debt landscape causing serious concerns for a sizeable portion of our society. The increasing worry around mental health and vulnerability in the population also means that it has never been more important to remove any barriers to formal procedures which provide people with a safe route out of debt. It is essential that the advice received is appropriate and properly regulated. Whilst supporting those in financial distress, the framework must also provide a prompt return to creditors where that is possible. There has to be confidence for all stakeholders in any regime, bringing benefits to the wider economy.”