The truth about personal insolvency

STOP PRESS: Since the introduction of The Corporate Insolvency and Governance Act 2020 (CIGA) in June 2020 and the date this blog was written, there have been multiple amendments and extensions to the temporary provisions intended to take account of the continuing unprecedented financial climate caused by the Coronavirus pandemic. We highlight the key updates as follows:

• ‘Suspension’ of wrongful trading liability retrospectively for the period 1 March 2020 to 30 September 2020 under CIGA 2020. Reintroduced by CIGA (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020 for the period 26 November to 30 April, and subsequently extended by the CIGA (Coronavirus) (Extension of the Relevant Period) Regulations 2021 and expired on 30 June 2021.
• Restriction on the use of creditors’ winding up petitions and statutory demands retrospectively for the period 1 March 2020 to 30 September 2020 under CIGA 2020. This period has been extended on four subsequent occasions to 31 December 2020, 31 March 2021, 30 June 2021 and 30 September 2021. For the period 1 October 2021 to 31 March 2022, winding up petitions can be granted for COVID-19 related debts (but not for outstanding commercial rents where the reason for non-payment was as a result of COVID-19), provided that the petition debt is £10,000 or more and that creditors have sought proposals from the debtor allowing 21 days for a response before petitioning.
• Restrictions on rent-related forfeiture of business tenancies retrospectively for the period 26 March 2020 to 30 June 2020, extended on four subsequent occasions to 31 December 2020, 31 March 2021, 30 June 2021 and is now due to expire on 25 March 2022, and the period in which commercial rent arrears recovery action (CRAR) is restricted has been extended for a further nine months to 25 March 2022.

At the time of posting this blog (8 December 2020), the UK has just emerged from its second national lockdown. Consequentially, although this is welcome news and we are all relieved to be able to see our loved ones over Christmas, we also need to spare a thought for the profound financial impact that Covid-19 had and continues to have on all of us. Whilst UK economic growth in the third quarter may have technically brought us back out of recession, the fourth quarter looks set to fall short of where we need to be to secure an early recovery. In the meantime, in the face of continuing uncertainty, we see that the number of people falling into severe debt has already doubled since March 2020.

So where are we in terms of the personal insolvency landscape, and how can people struggling with debt now maximise their prospects of coming through this difficult time with some measure of financial certainty at the end of it?

Changes in the law and latest research

As we enter into the lead up to the festive season, the number of individuals entering into formal personal insolvency procedures (such as Individual Voluntary Arrangements (IVAs), Bankruptcy and Debt Relief Orders (DROs)) is fast increasing, and in addition, many people are committing to informal debt management plans. Whilst we welcome the announcement of the The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 which will regularise these informal arrangements into Debt Repayment Schemes, and provide individuals with a breathing space during which professional advice can be sought, we suspect that these regulations coming into force in May 2021 will be too late for many.

Recent research published by the Financial Conduct Authority suggests that 12 million people in UK have low financial resilience, which means that just one adverse life event such as divorce or redundancy could be enough to trigger severe money problems. Similar findings stemming from a recent survey by debt charity Turn2Us showed almost 18 million people having been forced into some form of debt since the first lockdown. Those on furlough have been considerably worse off, with half of this group having fallen into debt since March.

There is now concern that further local and national lockdowns, tiered restrictions on travel and constraints on business openings will lead to increased business failures with consequential financial impacts on yet more individuals. Even with the announcement that the furlough scheme will be extended until the end of September 2021 (gradually tapering off from July 2021 to September 2021), and that the various loan schemes are similarly extended, job losses are still on the rise, and it is very possible that by the time these supports begin to fall away, there will be many businesses which have had to reorganise such that a proportion of furloughed jobs may no longer exist. Indeed, many economic models are currently predicting a spike in levels of unemployment in the Summer of 2021.

Of course, as unemployment numbers rise, so too we see a commensurate rise in the number of adverts for debt solutions which can appear almost too good to be true.

Avoiding the pitfalls

In this period of uncertainty, it can be very tempting – and indeed it is likely very sensible – for people to try and achieve a clean slate on their personal debts – it is easy to be drawn to advertising campaigns such as one we have seen recently, claiming to reveal “the method thousands are using to write off 81% of debt”.

Despite a recent change in the rules for organisations to advertise debt advice online, misleading advertisements still persist; claims of new and exciting ways to resolve debt problems are still signposted over the internet and on social media. Many of these advertisements direct people towards IVAs, and often downplay the advantages of other available debt options or exaggerate their disadvantages, which results in potentially vulnerable people being persuaded to enter into a formal and legally binding agreement, without first taking advice from an independent qualified person.

An IVA may well be the right debt solution for many people, whilst bankruptcy or a DRO may be more appropriate to others, but we have seen too many people enter into these procedures without a sufficient understanding of the consequences – sometimes because they have not had the right information, sometimes because they have not been fully open with their advisors about their true circumstances, and sometimes because they have only sought advice from either a financial or legal angle, not both.

We have seen many people come to regret their choice later, having perhaps been ‘sold’ an inappropriate IVA or one on terms which tie them in unexpectedly beyond the advertised term (often 5 years to begin with). Some believe bankruptcy will resolve litigation or other disputes they are in, but in fact it exposes them or their loved ones to expensive claims many years after they have been discharged from bankruptcy. Many debtors fail to realise the full extent of how these procedures can impact upon their credit record.

Our concern is that one or more formal insolvency options may not be suitable for an individual or their family’s circumstances.

Key message

Our message is that if you are even contemplating restructuring your personal debt you should steer clear of shiny websites and be cautious of the – often conflicting – specific advice available online and/or the independence of certain debt advisors (notwithstanding that they may be regulated by the FCA). There are plenty of reputable debt charities (such as Step Change and Debt Advice Foundation) that offer free, confidential, and impartial advice. However, our considered view based on many decades of experience is that the only people fully qualified to offer professional advice on your options such that you can safely place reliance upon that advice are qualified licensed insolvency practitioner accountants (IPs). Specifically, you should be looking for an IP with a full or personal insolvency licence on the financial side (to advise what is viable and if appropriate help you with the process) and (if you have any concerns at all about what might happen to jointly owned or occupied property, business interests or other assets) from a specialist insolvency solicitor.

Most specialist insolvency solicitors will be able to connect you readily with an IP who is right for your particular circumstances, and most IPs will be able to direct you to specialist legal advice where desirable. Generally, most IPs offer a free initial consultation, and most insolvency solicitors offer a fixed fee initial fact-find and guidance meeting.

Overall, it does not therefore matter who you approach first, but please do access at least one of these sources if you are at all unsure or concerned about how bankruptcy, IVA or a DRO may affect you or a loved one in the long term, as this could help you avoid a very expensive misstep.

Summing up

In times of significant uncertainty, it is all too easy to bury our heads in the sand and, when we do decide to take action to latch on to the first solution suggested by a somewhat desperate search on the internet. Unfortunately, more often than not this will only lead us to those who seek to misinform and/or mis-sell solutions which prey upon that desperation. However, with a little reflection and patience you will find that the right help is available and we are more than happy to assist in signposting that help as required.

Should you wish to discuss any insolvency issue (whether or not raised in this blog), please do get in touch with Mike Pavitt, or any other member of our Corporate Restructuring & Insolvency team and we will be delighted to help.

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This blog was co-written by Sophie Dipper, Trainee Solicitor and Mike Pavitt, Partner.