The great debt let-off

There has been much debate about the changes in personal insolvency
legislation introduced on 1 April 2004. The purpose of the changes was to
encourage risk taking and stimulate enterprise. However, since this original
concept was introduced, personal debt has spiralled and is now estimated to be
in excess of £1.4 trillion.

In the second quarter of 2006 there were 26,021 personal insolvencies, a 10%
increase on the previous quarter and a 66.3% increase on the same quarter last

We recently conducted a survey of insolvency professionals’ views of the
current and proposed changes in personal insolvency law and their impact on
consumer debt.

The profession felt that the reduction in the period of bankruptcy from three
years to one year had hampered investigations into debtor misconduct (69%) and
failed to promote enterprise (97%).

The profession also felt that bankruptcy was now less effective at deterring
unsustainable borrowing.

The relaxation of the bankruptcy law has been offset by the introduction of a
regime of bankruptcy restriction orders targeting errant bankrupts. A bankrupt
may have restrictions imposed upon them for between two and 15 years if found
guilty of misconduct relating to the bankruptcy. The profession, however, felt
that bankruptcy restriction orders would not be effective in deterring consumer
borrowing or discouraging the public from taking credit they could not afford.

There is also concern at the burgeoning market in individual voluntary
arrangements (IVAs). The profession favoured the introduction of simple IVAs for
consumer debtors with debts of £75,000 or less – 76% felt that these IVAs would
be a more accessible alternative to bankruptcy.

The government has proposed introducing debt relief orders to allow debtors
with liabilities of less than £15,000 to clear these debts in 12 months. This
proposal met with a 74% approval from the profession.

The majority of those surveyed (96%) also felt that credit was too easily
available and 86% favoured the introduction of regulations to impose sustainable

The profession seems unhappy with the relaxation of the punitive elements of
the bankruptcy system, but supportive of future proposals to alleviate consumer

Clearly, the current levels of consumer debt represent a major risk to the
economy. The alarming upward trend in personal insolvency and recent bad debt
provisioning by the banks point to a worrying trend in the individual’s ability
to meet these debts.

Gary Player is a partner in recovery and insolvency at Thomas Eggar

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