New bankrupts can't see the light, as they must now go through a very long, cold, dark tunnel of despair, worry and self-loathing to get there, after changes have been made to their post-bankruptcy conditions. The effects are likely to be negative for bankrupts, for the Insolvency Service, for creditors and the country.
Bankrupts now face a typical three years of misery with not a penny of income for entertainment or emergencies, forcing them under crisis to consider unlicensed loan sharks, and discouraging hard work or productivity. The net result of this badly calculated new policy is likely to be debilitating misery and, as a result of lower productivity, less money all round.
Paying their dues
Bankrupts are normally asked to contribute disposable income to an income payment agreement (IPA) and, failing that, they can be forced to do so through the courts using an income payment order (IPO).
IPAs and IPOs aren't new. They justly enable creditors to get some of their money back from a bankrupt's disposable income. Bankrupts are usually discharged inside 12 months, but these agreements and orders nevertheless usually last for three years – long after discharge.
The fair then...
Previously, through IPAs and IPOs, bankrupts would typically pay 50% to 70% of their disposable income to their creditors for three years. The more disposable income they had, the higher the percentage they'd pay. The minimum disposable income you needed to have before getting an IPA or IPO has usually been £50.
Related blog post
- The Consumer Credit Counselling Service writes:
The first steps towards a debt-free existence
Get impartial, independent advice from leading debt charity, the CCCS. on how to take your first steps to get out of debt.
Read this post
Those three years have been a painful, unpleasant time for bankrupts with little in the way of treats and pleasures, and just a bare minimum safety net. But for the most part it seems to have been a fair balance.
...And the unreasonable now
Debt professionals and charities have considered the fact that bankrupts could keep some disposable income to be essential for both mental health and practical reasons, as they have no allowance for emergencies and entertainment built into their agreements: it must come out of the smaller portion of disposable income that they're allowed to retain. What's more, allowing them a percentage of their extra earnings leaves them with an incentive to work harder and earn more money.
Creditors and insolvency practitioners all benefit financially from the bankrupt's higher earnings, as they all take a cut of the disposable income, and the country and employers benefit from greater productivity from the bankrupt.
However, the insolvency Service has changed its guidance on IPAs and IPOs in what some debt practitioners, counsellors and experts are variously calling 'unreasonable', 'laughable', 'ill thought out' and 'idiocy in the first degree'.
As insolvencies reach record levels, Ed Bowsher looks at some of the ways to deal with a personal debt crisis.
According to the new guidance, the bankrupt will now get to keep no disposable income whatsoever. That means no allowance for emergencies, and no money for entertainments, pet insurance or presents. No matter how hard the bankrupt works.
This leaves bankrupts exposed to greater strain, which causes lower productivity, and greater risk of further financial problems or mental health problems. What's more, they have absolutely no incentive to work or to work harder.
As before, if the bankrupt gets a promotion or loses his job, the IPA or IPO can be varied or suspended. Yet now, whatever happens, the bankrupt will not be allowed more disposable income, even if they want to work more hours or go for a promotion. This also creates the crazy situation for some, where, if they worked less or not at all, they'd still be in the same financial position.
Although no minimum disposable income is written into the guidance, there has been an unwritten normal minimum of £50. After that, you would be expected to agree to an IPA. I have been getting reports that, since the 1st December, new bankrupts have been pressed to take IPAs if they have just £20 above the cost of their basic essentials.
The cause of these changes
These changes have happened quietly without announcement. I have not yet heard back from the policy adviser at the Insolvency Service, but experts believe these changes were to help pay for insolvency practitioners, because they take a cut of the disposable income. (Although I seem to recall the increase in the bankruptcy fees was also explained away using the same reason.)
Yet, as I have explained, the incentive to earn more disposable income now appears to be gone, if the new guidance is to be rigorously enforced. This means that the industry may actually be shooting itself in the foot.
Related how-to guide
Destroy your debt
If your credit card bills and debts are getting you down it's time to make a stand - here are five easy ways to start.
See the guideSome experts are also speculating that the costs of the changes will prove deeply prohibitive. If IPAs become standard for anyone with just £20 to spare, there could be a lot more agreements for tiny amounts of money. Furthermore, the administrative burden of altering these agreements or court orders whenever someone's allowable costs change by just £20 will be a strain on the insolvency system and the courts.
What to do in this situation
An income payment agreement is not compulsory. If you think it's too strict, you could refuse to sign it and leave it to the court to decide whether it agrees. A respected debt expert said he would go to court explaining that such a solution would likely put him in hardship, and that it leaves no margin for error such as a broken down boiler, nor for sudden, significant changes in cost of living.
There's a chance, slim though it may prove to be, that the industry won't try to put the new guidance rigidly into practice. However, one debt-industry insider says that this is 'doomed to failure if they try'. I hope he's right.