Review of the personal insolvency framework: Citizens Advice response to the Insolvency Service
At Citizens Advice, we offer free, independent, and confidential advice and information to anyone who needs it. In 2021/22 we helped a total of 293,231 people with debt problems. We gave advice to 25,979 people about Debt Relief Orders (DROs), 9,207 people about Bankruptcy and 5,325 people about Individual Voluntary Arrangements (IVAs). As a DRO Competent Authority, we supported 7,589 to obtain a Debt Relief Order.
In our response to the call for evidence - review of the personal insolvency framework we’ve drawn on a wealth of internal data and insights as well as independent commissioned research. Our evidence base includes
- A review of 320 evidence forms about IVAs, DROs and bankruptcy submitted by advisers from May to September 2022
- Analysis of income and expenditure data from 42,518 Citizens Advice clients
- Insights from more than 100 participants in our regular Network Panel survey
- A survey of 565 money advisers across the free debt advice sector (195 working within Citizens Advice), conducted jointly with other debt advice charities and networks
- 14 in-depth interviews conducted by Britain Thinks with people who are or have been in an IVA
- An external survey conducted by Yonder Consulting of more than 400 people who are or have been in an IVA, DRO or bankruptcy.
1. Upfront administrative fees price people out of debt relief
The £680 bankruptcy fee and the £90 DRO fee are simply unaffordable for many people seeking debt relief. Fees delay access to debt relief and often prevent people from pursuing the best option for their circumstances altogether.
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88% of people who had been in a DRO or bankruptcy said they struggled to pay the fee, 35% cut back on essentials like food and a quarter fell behind on rent and bills. 71% delayed going into debt relief because of the fee.
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Based on analysis of Citizens Advice budget data, it would take a typical DRO-eligible client 5.6 months to save the £90 DRO fee while those saving up for bankruptcy would take more than 8 months.
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Upfront fees leave people with no viable alternative, or push them into options that may be less suitable. 42% of people in IVAs who had also considered a DRO say they ruled it out partly or mainly because of the upfront fee.
2. The IVA market is delivering poor outcomes for consumers
IVAs offer partial debt relief in return for making repayments over a fixed period of time, typically five years. They are a useful option for people who are in business or have assets to protect, but are often much less appropriate in other situations. They also involve a degree of risk, in that debts are only written off if the full term of payments is completed. Unlike DROs and bankruptcy, IVAs are a commercial remedy and are now very widely marketed to individuals in debt. We’re concerned that IVAs are being set up for people who qualify for cheaper, less risky options, and who haven’t been given full, accurate advice.
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52% of advisers across the free sector say they often speak to someone who is in a failed or unsuitable IVA.
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In six months we received over a hundred reports of IVA poor practice from advisers. 1 in 5 involved someone with a benefits-only income and in nearly 30% of cases advisers reported that the client was eligible for a DRO. More than half were about the quality of affordability assessments and/or advice about alternative options provided by IVA firms.
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75% of people in an IVA struggle to keep up with IVA payments according to polling of people with recent experience of being in an IVA. More than half said their IVA payments didn’t leave them with enough money to cover essential unexpected costs.
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Interviews with current and former IVA users underline that people seeking help with debts often have limited awareness of debt remedies or sources of advice. Many are effectively at crisis point when they seek help, making the offer of an apparently quick and simple solution difficult to resist.