The changes in household debt, debt solutions and debt advice.

I first entered into the insolvency industry in 2009 at the time the economy was still reeling from the Credit crunch, the Country ‘appeared’ to be pro Europe and Manchester United were still dominating the English Premier League. I initially specialised in Personal Insolvency at a time when the average household debt was running at approximately 140% of disposable income and the recession was developing into the longest on record. Household debt was fuelled by mortgages, credit card debts and overdrafts.

The debt charities were being overwhelmed by the sheer number of enquiries and individuals reverted to seeking help from fee-charging debt advice companies. Many of these companies were non-regulated and, whilst I have no doubt the majority of advice given was correct, there were a few companies whose practices at the time were questionable.

An insolvent individual is usually directed to one of four options, being either a Debt Management Plan (‘DMP’), Bankruptcy, a Debt Relief Order (DRO) or an Individual Voluntary Arrangement (IVA).

In 2009 there were 134,252 recorded individual insolvencies comprised of 74,670 bankruptcies, 11,941 Debt Relief Orders and 47,641 Individual Voluntary Arrangements. Unfortunately, the number of DMPs is not published as they aren’t officially recorded by a public body but it is likely that these also ran to many tens of thousands.

Bankruptcy is the least popular self-help option, perhaps due to the perceived stigma attached to the terminology; however, bankruptcy numbers remained high due to it being a popular consumer debt recovery option amongst creditors.

IVAs traditionally occupied the middle ground in terms of popularity amongst debt solutions. IVAs are popular because the arrangements are private as between an individual and their creditors. IVAs generally also have a fixed time limit of 5 to 6 years which provides certainty to both the individual and to their creditors. IVAs can only be proposed by an individual having engaged the services of a Licensed Insolvency Practitioner who is supportive of that solution for the individual concerned.

The Government also introduced DROs in April 2009. DROs are a ‘light bankruptcy’ solution for individuals who have small debts (was £15,000 now £20,000) and minimal disposable income (£50) and relatively small value of assets (was £300 now £1,000). The costs involved in entering into a DRO (£90) are cheaper than petitioning for your own bankruptcy.

The number of DMPs is not published as they aren’t officially recorded by a public body. DMPs are not regulated but they are very simple to set up and as they are also extremely flexible they used to be popular.  DMPs have however experienced a variable reputation within the insolvency profession as some unregulated advisers used the low-cost, relaxed regime that the process involves to draw in customers for whom a regulated option might have been more appropriate.

Further information regarding the advantages and disadvantages of each option can be found on our website here.

Fast forward to 2020

Fast forward to 2020 and the UK and the debt advice industry have changed dramatically. Having now determined to exit the European Union, our economy is suffering from consequent uncertainty, and the English Premier League is now dominated by Liverpool FC (this may not actually be relevant or interesting unless you’re into football!). Personally, having remained in the Insolvency profession and chosen to pursue and achieve my qualification as an Insolvency Practitioner during this era, I have noticed dramatic changes in the debt advice industry over the intervening 11 years, largely thanks to market consolidation and a significant increase in regulation.

Household debt is now approximately 126% of disposable income thanks to historically low-interest rates and a record high level of employment. Household debt is still being fuelled by mortgage debt and consumer credit but, whilst households have reduced their dependency on credit cards Hire Purchase and similar Personal Contract debts have increased; this is particularly noticeable with motor vehicles and technology.

Consumer Debt levels still remain historically high and at the same time, the provision of debt advice services has changed dramatically.

The latest statistics for 2019 show that there were 122,181 individual insolvencies made up of 16,702 bankruptcies, 27,497 DROs and 77,982 IVAs.

Whilst the Government changed the bankruptcy regime to make it easier for individuals to petition for their own bankruptcy through their online portal, the Government also increased the minimum debt required to petition for someone else’s bankruptcy from £800 to £5,000. As a result, the annual rate and volume of bankruptcies have declined in the past ten years.

Throughout the last 10 years, DRO numbers have remained high. Personally, I believe consumers have elected to enter into a DRO as opposed to entering into a DMP. This could be attributable to the fact that fee-paying Debt Advice Companies must now be registered with the FCA. The FCA state that only 1 in 8 applicant companies achieved FCA authorisation meaning that fewer companies were available to offer DMPs. In addition, individuals have greater access to information that enables them to form their own opinions and they generally recognise that it makes financial sense to write off debts within 12 months (the impact of a DRO) as opposed to being in a DMP that could last for a lifetime.

Another consequence of the decline in fee-paying debt advice companies is the additional pressure this has placed on debt charities due to the increased volume of enquiries. Naturally, individuals are turning to the internet for debt advice thanks to sites such as Debt Camel, Money Advice Centre and Money Saving Expert. The individual has more knowledge but inevitably there is still a need to speak to a Debt Advisor to discuss options, to formulate and then implement a debt relief plan or a debt solution.

Within the IVA market, we’ve experienced significant consolidation resulting in a reduction of operators within that sector, this is attributable largely to a lowering within the industry of the acceptable standard criteria to propose an IVA. This used to be £300 disposable income and £20,000 minimum debt over 3 different debts but this has been reduced to £100 disposable income and £6,000 minimum debt over 2 different debts. The commercial impact of this is a reduction in the unit profitability of each IVA for the insolvency practitioner’s business and the need therefore to scale-up the bulk IVA providers’ businesses to sustain their commercial models.

Due to the shift in the criteria, IVAs are now at a historical high and in 2019 made up 64% of total individual insolvencies compared to 35% in 2009.

Going forward I believe that bankruptcy levels and DRO levels will maintain their current levels due to the Country’s economic need to maintain current interest rates. I also believe greater emphasis will be placed on the quality of IVAs being proposed as a result of greater scrutiny being placed on IVA failure levels.

In a society that thrives largely on often disposable consumption, it is difficult to imagine the level of consumer debt actually declining.  Low-interest rates fuel consumer credit and economic policy requires that demand continues at a level that is adequate to sustain the domestic retail and manufacturing sector but without too much inflationary pressure.  With the current levels of consumer debt, if interest rates do increase, it is likely that the volume of individual insolvencies will rise further as mortgages become more expensive to maintain.

If you require assistance on personal debts and would like to enquire further about IVAs please do not hesitate to either contact me or my colleagues at Poppleton and Appleby.

Written by Manraj Mand, Insolvency Manager, Huddersfield Branch.

Please note Poppleton & Appleby do not administer DMPs, DROs, or any other debt solutions. We only provide advice after completing or receiving an initial fact find where the individual(s) concerned meets the criteria for an IVA, therefore, all advice is given in reasonable contemplation of an insolvency appointment.