Insolvency: thousands of Britons could cut debt as advice changes

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Thousands of Britons could have their debts written off or monthly repayments slashed after the government told insolvency 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 on the oversight of individual voluntary arrangements (IVAs), repayment plans agreed with creditors that enable problem debts to be repaid over an agreed length of time.

The advice notes that existing agreements may have been drafted before the individual had knowledge of the “current financial climate, rising inflation, and increases to energy and other household outgoings”. These pressures “may have an impact on a consumer’s ability to be able to make monthly contributions … at the same level as previously agreed”, it adds.

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

The Insolvency Service says advisers should consider requests from people who want to lower their monthly payments

Sara Williams, a former debt adviser and the founder of the website Debt Camel, says anyone with problems should talk to their IVA firm now: “There is no need to wait until your next annual review.”

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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 were to drop below that level the insolvency practitioner should consider whether to end the agreement early based on the payments already made into the plan.

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

StepChange says the changes mean “there is now, for the first time, a realistic chance that their creditors will agree to an early completion of the IVA on the basis of funds paid to date”. Peter Wordsworth, the head of insolvency services at the debt charity, adds: “This is a very welcome and pragmatic development in light of the cost of living crisis.

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

View image in fullscreenThe government has told insolvency firms to consider the impact of the cost of living crisis on people’s ability to keep up with repayments. Photograph: Dominic Lipinski/PA

An IVA is an arrangement to pay all or part of your debts though regular payments to an insolvency practitioner, who then divides the money between creditors, who distributes the funds to creditors. It can begin if 75% of the creditors agree to it, and applies even to those who disagree with it.

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The new advice aims to avoid the collapse of an IVA, which can have significant consequences for the individual. If this happens the person could become liable to pay the full balance of their debt and cover IVA costs and fees, and leave them vulnerable to enforcement action by creditors.

“If you’re unable to afford these reduced payments, or they would make your IVA last longer than seven years, or would now be eligible for another option like a debt relief order, then practitioners ought to be considering whether offering an early settlement based on what you’ve paid already is a suitable option,” says Graham O’Malley, a senior debt expert at Citizens Advice.

“Whether early settlement is an option for you will depend on what your practitioner says, and, ultimately, all of the organisations you owe money to will have to agree to this formal change in your agreement.”

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