Are too many individuals being channelled into bankruptcy, when there are alternative routes to recovery? With bankruptcy becoming more acceptable in our economy there is now less stigma attached to it. As a consequence, there is a potential danger that the advice given to individuals in serious financial difficulties may be to declare themselves bankrupt in the knowledge that their debts will be written off. Provided fair value is paid for the equity to the trustee, even the matrimonial home tends to be preserved. A person who has gone bankrupt is likely to be discharged from bankruptcy after two or three years, and probably after just 12 months when the Government has completed its current review on the matter. Bankruptcy often seems like the obvious option.
However, I would question whether the debtor has always taken the correct advice at the outset and explored all of the options available, since bankruptcy is often not the best way forward.
At some stage in their lifetime, an individual may be faced with a burden of debt that they cannot afford to pay, either in whole or in part. The individual may have overspent and have an overdraft and several credit card accounts, or they may be in a business which is suffering either from growing pains or loss of business, which in turn has resulted in insolvency. At this point the individual should seek advice from a professional who is experienced in business recovery and insolvency, and who should be able to explain all of the options. Without taking specialist advice, no one should assume that bankruptcy is inevitable, nor should they enter into an informal arrangement with creditors. It is not just the current problem that needs addressing, but planning for the future of the individual and ensuring that their earnings capacity is not curtailed by bankruptcy, thereby potentially prejudicing not only their own position, but also that of their creditors.
There are many businesses and professionals that would benefit from entering into an individual voluntary arrangement (IVA) with their creditors, since it has the ability to preserve practising certificates and licences. Bankruptcy can often lead to disciplinary proceedings or, in the worst case, dismissal. Solicitors, doctors, accountants and dentists, for example, are just a few of the types of profession that would be affected. With the loss of professional standing and reputation comes the inevitable reduction in income and lifestyle. The benefit of an IVA is its flexibility to come to a bespoke arrangement to suit the needs of all parties, debtor and creditors alike.
From 1992-98 there were approximately 5,000 IVAs per annum. In 1999 this rose to 7,195 and in 2000 reached 7,978. Although there are no specific statistics available, most of the increase appears to result from increased consumer debt. Compare these figures with the number of bankruptcies: an average of 31,500 in 1992/3, which then gradually declined to 19,647 in 1998, although the figure is now rising and in 2000 stood at 21,500. Obviously, a number of these should rightly be bankruptcy cases where the individual has a burden of debt and no assets, but there must be many cases where an IVA would have been more beneficial to all parties. The statutory costs alone are a burden in bankruptcy, reducing the pot available to creditors.
The lawyers who, in my view, will be best placed to advise clients will be those with an insolvency presence in their practice or have the willingness to consult with those best placed to provide specialist and impartial advice. Lawyers practising in many areas of law, for example private client, trust/tax and family, will invariably have clients requiring personal insolvency advice, and bankruptcy may seem like the obvious option, but it is not necessarily the best. It is important to remember that a debtor is often at their wits' end and is likely to have placed their head firmly in the sand. When they have the courage to surface, or are indeed forced to surface by creditor action, it is imperative that the client is advised on all options, including an IVA, and not just bankruptcy alone.
Julia Branson is director of business recovery services at PricewaterhouseCoopers