Bankruptcy: Thousands of Brits could shed debt if advice changes | Bankruptcy and IVAs

TThousands of Brits could have their debts written off or monthly repayments cut after the government advised bankruptcy advisers to consider the impact of the cost of living crisis on people’s ability to keep up with repayments.

The Insolvency Service has issued new guidance overseeing Individual Voluntary Arrangements (IVAs), repayment schedules agreed with creditors that allow problem debt to be repaid over an agreed period of time.

The council notes that existing agreements may have been drafted before the person was aware of “the current financial situation, rising inflation and increases in energy and other household spending”. This pressure “can affect a consumer’s ability to make monthly contributions… at the same level as previously agreed,” she adds.

The move comes at a time when more and more people are struggling with soaring food, fuel and energy bills. According to the Office for National Statistics, 81,199 IVAs were registered in England and Wales in 2021 – the highest since records began in 1990 – while 23,997 were registered in the first three months of 2022. Separate government figures show that 6,300 to 7,800 IVAs were registered a month last year.

Sara Williams, a former debt counselor and founder of website Debt Camel, says anyone having trouble should speak to their IVA firm now: “There’s no need to wait until your next annual review.”

The Insolvency Service says advisers should consider requests from people who want to lower their monthly payments, with creditors generally willing to accept reductions of up to 50% of current contributions, falling to a minimum of £75. If monthly payments fall below this level, the trustee should consider terminating the arrangement early based on the payments already made into the plan.

Decisions are made on a case-by-case basis and all creditors must agree to the proposal. The insolvency practitioner would also need to consider whether an alternative route, such as debt relief or bankruptcy, would be more appropriate.

According to StepChange, the changes mean that “there is now, for the first time, a reasonable chance that your creditors will agree to an early closing of the IVA based on the funds paid to date”. Peter Wordsworth, Head of Insolvency Administration at Debt Charity, adds: “This is a very welcome and pragmatic development given the cost of living crisis.

“Creditors are now more receptive to closing IVAs early, where this is the most pragmatic option for people whose IVAs would otherwise fail, and where creditors stand little chance of getting more money back by requiring the customer to accept an alternative debt solution , for example a pardon order.”

The government has instructed bankruptcy firms to consider the impact of the cost-of-living crisis on people’s ability to keep up with repayments. Photo: Dominic Lipinski/PA

An IVA is an agreement to pay off all or part of your debt through regular payments to an insolvency practitioner, who then splits the money between creditors, who distributes the funds to creditors. It can start when 75% of creditors agree and even applies to those who disagree.

The new advice aims to avoid the collapse of an IVA, which can have significant consequences for individuals. In this case, the person could be required to pay the full balance of their debt and cover IVA costs and fees, leaving them vulnerable to enforcement action by creditors.

“If you can’t afford those reduced payments, or it would make your IVA last longer than seven years, or make you eligible for another option like debt relief now, practitioners should consider offering early settlement on what you’re already paying.” is a viable option,” says Graham O’Malley, senior debt specialist at Citizens Advice.

“Whether early settlement is an option for you depends on what your doctor says, and ultimately any organizations you owe money to must agree to this formal change in your agreement.”

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