The personal insolvency landscape: Time for reform?

01 December 2022

While last year, the ‘Future of Insolvency Regulation’ consultation proposed the biggest change to insolvency regulation since 1986, this summer has seen the Government explore reforming the personal insolvency framework through a call for evidence published in July.

Finding the balance

The current economic landscape has pushed many individuals into financial difficulties – with the residual impact of the pandemic, energy price increases and inflation at a 40-year high. In the first quarter of 2022 alone, 32,197 people in England and Wales entered a formal insolvency process – the highest recorded quarterly figure since the end of 2018. And these high figures show no sign of slowing down.

Against this backdrop, a continued increase in the number of people who become insolvent unfortunately seems inevitable. And, if personal insolvencies continue to rise, it’s important that we have a regime in place that strikes the right balance between allowing people faced with financial difficulties to get back on their feet by relieving their indebtedness, whilst also seeking to return to creditors what is owed to them.

Reforms on the horizon

In July, the Insolvency Service published its call for evidence on the personal insolvency framework. At this stage the Government is not putting forward proposals for reform, but using the call for evidence as a wide-ranging review of the framework – one which poses open-ended questions about its operation and effectiveness.

The current regime, which has been in place since 1986, has not been updated for many years, with the most recent major change seeing the addition of Debt Relief Orders (DROs) in 2009.

The call for evidence covers the following overall themes:

1. The underlying purpose of the framework – including whether it strikes the right balance between a “fresh start” for the debtor and upholds the interests of other stakeholders;
2. Fees, funding and costs;
3. The current insolvency procedures and how they are working – the scope of this call for evidence is limited to bankruptcies, IVA and DROs only;
4. The international perspective – whether elements of other national regimes could improve the personal insolvency framework in England and Wales.

Views from the profession

R3 overall welcomes this call for evidence, since we have only seen piecemeal changes made to the personal insolvency framework in recent years. However, any wholesale changes made must be fit for purpose and must seek to make genuine improvements to the regime in the best interests of debtors and creditors alike.

Since July, we have been engaging with members to discuss the review and garner feedback from the profession to help inform our consultation response. This has included meetings with our Personal Insolvency Committee, and a member-wide survey to ensure all our members’ views are heard by the Government.

Discussions with members so far have thrown up questions around establishing what the framework review is actually trying to achieve, potential ways we can help to destigmatise entering an insolvency process, and concerns around the high costs involved in entering a bankruptcy which may force people into a cheaper option but that is less suited to their situation.

The call for evidence has now closed and we have submitted our response. We’d like to thank R3's Personal Insolvency Committee for their detailed input and all R3 members who have contributed to putting our response together by completing our survey on the call for evidence. We expect to see a government response to this in the new year with a formal consultation likely.

You can download a copy of our response here.