Creditors could teach insolvency

IN EARLY NOVEMBER the Insolvency Service launched a consultation on possible reforms to bankruptcy and winding-up processes. It proposes straightforward creditor petition bankruptcies and winding up cases should in future be dealt with by a newly created adjudicator post and not the courts. The consultation follows on from previous discussions around simplifying the process.

Focussing just on bankruptcy, industry sources say many creditor petition cases do not involve a substantive dispute between creditor and debtor, also that many problems arise simply from trying to make the debtor acknowledge there is a debt they have not or cannot pay. Currently the courts deal with all bankruptcies, whether or not there is a substantive dispute, which uses up valuable judicial time.

One idea suggested in the consultation was the introduction of a pre-application process to the bankruptcy system. The intention is to encourage the debtor to engage at an early stage, rather than leaving it to the last minute - which often happens.

There are numerous examples of cases where it is only when the court hearing is imminent that the debtor wakes up to the seriousness of his or her predicament, and takes steps to prevent a bankruptcy order being made. This might simply entail submitting tax returns so a revised assessment can be made that the debtor then agrees to. How much better a process could this be if this realisation was brought home at an earlier stage!

There is also the issue of the so-called "ostrich debtor" who buries their head in the sand. Research by the Free Legal Advice Centres suggested two main reasons why this occurred: because of the legalistic language and jargon used in documents explaining the personal insolvency process; and a lack of awareness of the help available to them.

The ongoing consultation builds on previous work on pre-action notices, and suggests that it should be mandatory for a creditor to have made every effort to engage with the debtor before making an application for bankruptcy.

Specifically it has been suggested creditors should send debtors a pre-action notice in every case, which would contain statements in plain English about the importance of seeking early advice, and information on where that advice can be obtained.

The notice should also be explicit about the extent a creditor is willing to consider amending current repayment terms. This could encourage debtors to get in touch quicker and make offers to repay what he or she can afford - without the need for a formal insolvency process.

The possible consequences of non-payment should also be clearly stated, so the debtor is left in no doubt it is in his or her interests to engage. Other information which could be included on the notice is alternative forms debt resolution outside of insolvency processes, such as mediation services.

Creditors currently engaged in using bankruptcy petitions will doubtless have further ideas that might make the pre-application process more effective. But, the purpose of this consultation is to invite those most closely involved to put forward any such ideas.

It is important to ensure the process of applying for bankruptcy is fair to both the debtor and creditor. Early engagement is key to this and a balanced and effective pre-application process could benefit all those involved, which is what the Insolvency Service hopes to achieve.

Nick Howard is director of policy at the Insolvency Service

The Reform of the Process to Apply for Bankruptcy and Compulsory Winding Up consultation closes on 31 January 2012.