Legal Mechanisms to Deal with Debt [Draft outline]
I. A few introductory points
Personal insolvency figures – massive increases over the past decade – some 130,000
personal insolvencies recorded in 2010. Tip of the iceberg?
Profile of bankrupts – Insolvency Service survey. Bankrupts are getting younger.
Potential candidates for personal insolvency might be:
- individuals made redundant
- divorcees
- self employed who fail to account for tax
- consumer credit “junkies” and irresponsible lenders
- council tax defaulters (but, in terms of being bankrupted, the picture may change here)
- company directors who have acted as guarantors of their company’s overdraft
- spouses who have acted as guarantors of their partner’s debts
- litigation losers
- Lloyds Names (a 1990s phenomenon)
- victims of negative equity
- graduates with education debt
Types of debt – unsecured and secured debt (mortgages)
Debt can be sold – the person collecting the debt may not be he person you borrowed
from
Diversity in debt collection/ resolution models in English law
- deeds of arrangement. Available since 19th century but not used today.
- debt management agreements (largely unregulated)
- county court administration orders
- enforcement of court judgments with particular reference to charging orders
Debt, death and your family
- debt can survive death and can be recovered from your estate
- debt is personal to the debtor and is not a family obligation in English law (spouses,
civil partners and children are generally not responsible for your debt)
- “sexually transmitted debt”: the spouse who is persuaded to guarantee her partner’s
business debts
Relative attractiveness of UK personal insolvency system – the emergence of bankruptcy
tourism “bankruptcy tourism” linked to the EC Regulation on Insolvency Proceedings
(1346/2000). For example, a German who has incurred substantial debts in Germany can
relocate here at the 11th hour and, provided the relocation is genuine, can have his
bankruptcy governed by English law. German creditors have to prove under English law.
Why should society adopt a lenient view of debtors? Cork Committee (1982).
II. Bankruptcy
Historical development
- terminology (the broken bench)
- Tudor origins of bankruptcy law to restore confidence
- introduction of discharge from bankruptcy in 18th century (Daniel Defoe)
- imprisonment for debt for non traders (visit Lancaster Castle)
- Victorian reform (see the novels of Charles Dickens). 1883 Bankruptcy Act foundation.
- liberalisation from 1970s onwards [via Insolvency Act 1976, Cork Report 1982,
Insolvency Act 1986, Insolvency Act 2000, Enterprise Act 2002].
Key features of the present system - only the court can make a bankruptcy order but can
it cope with increased volume of traffic?
Insolvency Act 1986 and Insolvency Rules 1986 (SI 1986/1925) Part 6 (as amended)
1. Initiation
Bankruptcy may be creditor-initiated or debtor-initiated. Most bankruptcies these days
are debtor-initiated.
Creditor initiation:
- statutory demand (debt must be at least £750)
- setting aside applications (disputed debts)
- petition
- order of court
A creditor can still bankrupt you even if there is little prospect of recovery of debt.
Debtor initiation:
- petition
- order
Bankruptcy is not irrevocable – there is the possibility of annulment if you then pay up
but the costs will have increased significantly in the process.
2. The trustee in bankruptcy
- must be a licensed insolvency practitioner (private sector).
- takes control of all assets.
- bankrupt must cooperate (can have letters redirected and can be imprisoned for
contempt).
- role of Official Receiver (public sector). OR can act as trustee if no private sector
trustee appointed.
- challenging the trustee.
3. Realising the estate
- wide concept of bankruptcy estate (tangible/ intangible assets covered). Assets acquired
after bankruptcy commences could be included. Expensive items could be replaced with
cheaper versions.
- excluded assets (note “tools of the trade” exception).
- the family home. If solely owned by bankrupt the trustee can have family put out once
12 months has elapsed unless exceptional circumstances. If jointly owned trustee can
seek a sale after 12 months and the court will usually agree unless exceptional
circumstances.
- income payment orders and agreements.
- setting aside prior transactions. There is a particular problem with last minute
arrangements with family members (preferences and transactions at an undervalue).
Conflict between the insolvency rules and rules on property allocation on divorce.
- the problem of protracted realisation. Trustee must take realisation action against
family home within 3 years of appointment.
4. Discharge from bankruptcy
- one year automatic discharge (it used to be 3 years; before 1975 there was no automatic
discharge).
- discharge does not end the powers of the trustee (a common misconception).
- discharge does not wipe out all debts: fines and student loans, for example, survive.
5. Miscellaneous features
- disqualifications for undischarged bankrupts (cannot be a company director).
- publicity.
- bankruptcy restriction orders (for those who abuse credit).
III. Individual voluntary arrangements
These were introduced in 1985 in order to offer an alternative to bankruptcy. They were
intended to help individuals who had built up unmanageable debt, but who had ongoing
income streams, which could be used to pay off amounts of debts in instalments. A
typical IVA will offer reduced payments to creditors over a 5 year timescale. Creditors
owed 75% of the debt must support. If the IVA meets required level of support all
creditors are bound by terms of the contract and cannot pursue debtor through bankruptcy
proceedings.
Originally, in order to get an IVA approved a court order could be required. This interim
order would protect the debtor whilst the IVA package was being put together. Since
2000 that has no longer been a mandatory requirement.
Mass selling of IVAs through the media has damaged reputation of the IVA model and
has aroused hostility from repeat creditors.
The IVA is managed by an insolvency practitioner. As nominee, he/ she will get your
proposal passed by creditors. The nominee will then usually act as supervisor of the
arrangement. Typically IPs charge an up front fee plus regular payments thereafter.
Failure to comply with the promises made in an IVA could result in bankruptcy. It is an
offence to seek to obtain an IVA by providing false or reckless information.
Is going for an IVA a rational choice? Advantages over bankruptcy?.
IV. Debt relief orders
These were introduced in April of 2009 to deal with the problem of the large numbers of
debtors who could not be catered for by the two models discussed above. Since their
inception many thousands of debt relief orders have been granted (there were 12,000 in
2010). The procedure is mapped out in Part 7A of the Insolvency Act 1986 (which was
inserted by s. 108 of the Tribunals, Courts and Enforcement Act 2007) – see also
delegated legislation for detailed rules.
- criteria. A DRO is only available to a person with unsecured personal debts of less than
£15k, with assets worth less than £300 and a surplus monthly income of less than £50.
- application via an intermediary to the official receiver (not to the court).
- duration of DRO (12 months).
- effect of DRO (moratorium and discharge from debt).
- quality controls (residual role of court, curbs on further credit).
- debt relief restriction orders and undertakings.
V. Reflections
Is the system becoming too generous? From a comparative perspective this might
explain the bankruptcy tourism phenomenon.
Rates of return for creditors – transparent fee levels
The need for education – government initiatives in schools
VI. Reading/ information
Milman, Personal Insolvency: Law, Regulation and Policy (Ashgate, 2005)
Lester, Victorian Insolvency (Clarendon Press, 1995)
Insolvency Service website (very useful)
Bankruptcy Advisory Service
The Bankruptcy Association
Association of Business Recovery Professional (R3)
HM Court Service website - Bailii
Professor David Milman, Head of School of Law, Lancaster University
20/2/11