Personal insolvency system ‘needs to be overhauled’

Changes need to be made to the current personal insolvency system to protect both debtors and creditors. 

This is according to a new report from the industry trade body R3, as it is concerned about how consumers will fare whenever interest rates do eventually go up again. 

Among the worries listed by the group are that reckless spending is still not discouraged enough, which only serves to make the job of creditors tougher, while some individuals still find it difficult to gain access to the right debt relief solution for their specific circumstances. 

R3 has put forward a number of suggestions it thinks will improve the system, including letting the £700 up-front bankruptcy administration fee to be paid in instalments. Frequently consumers simply do not have this money and so they cannot afford to take action. 

It also believes that standard bankruptcy terms should be extended from one year to three years, while it should also be made easier for debtors' repayment proposals to be approved by creditors with regards to individual voluntary arrangements (IVAs). 

Stuart Frith, chair of R3's personal insolvency committee, said: "A good personal insolvency regime must strike the right balance between helping financially struggling people get back on their feet, and protecting creditors like banks and businesses from people running up debts without being worried about the consequences."

He added the current system has the right building blocks in place, but there is still more work to be done to ensure consumers gain access to the right solution, especially as interest rates will eventually rise from their historic low level of 0.5 per cent.

Figures released by R3 show that 2.4 million Britons are currently using debt management plans, while 100,000 people have sought out a more formal solution, such as an IVA or bankruptcy. 

By Amy White