Insolvency Service - Summary of the Discussions on The Debtor's Bankruptcy Petition Reform Project Seminar

09 NOV 2009

The Insolvency Service have sent out some notes and a powerpoint slide presentation (available by email from me) in relation to the "The Debtor’s Bankruptcy Petition Reform Project Seminar" which was held on the 20th March 2009 at their Bloomsbury Street headquarters. Unfortunately teaching commitments kept me away although I had originally intended to go along. These documents are then very useful indeed! I have reproduced them here as they make extremely interesting reading.

The document notes:

"Summary of the Discussions on The Debtor’s Bankruptcy Petition Reform Project Seminar

In Attendance

A total of 49 individuals representing the credit industry, debt advisory services, Insolvency Practitioners, insolvency regulators, the judiciary and government departments attended the seminar on the reform of the debtor bankruptcy petition process.

Introduction

The seminar was convened to discuss some of the concerns from the initial consultation on proposals to remove the court from the debtor petition process.  The proposals call for a constitutional change to the legislation which requires careful and full consideration by stakeholders and Parliament.  For The Insolvency Service, this was an opportunity to identify the root of the concerns and to consider ways to overcome them jointly  with our stakeholders.  The concerns centred around:

  1. The provision of advice and information to those wishing to petition for their own bankruptcy online;
  2. Confirmation of the true identity of the person petitioning for their own bankruptcy
  3. Maintaining the seriousness of bankruptcy as a regime.

The seminar discussion points were as follows:

  1. Advice and information
  2. Intermediaries
  3. Identity
  4. Gravitas

The following notes reflect the comments and views which were raised by those in attendance and those who forwarded their comments to the Insolvency Service ahead of the seminar.  The notes are not intended to be verbatim transcripts.

Themes

Advice and Information

  • Research undertaken by District Judge Jordan into the extent of delays faced by debtors who petition for their own bankruptcy found that in some cases debtors faced a wait of several months before their petition was heard.
  • Currently neither the court services nor the Official Receiver’s office compels debtors to seek advice before petitioning for their own bankruptcy.  Although Insolvency Service research shows that 94% of debtors do seek advice prior to petitioning for their own bankruptcy, the seminar group were asked to consider how, under the proposed scheme, can there be certainty that the debtor is fully informed and has received adequate advice prior to petitioning for a bankruptcy order?
  • The group recognised the importance of good quality debt money advice to inform people to make the right choice. However, the ‘correct advice’ debate runs across the debt resolution dialogue for Debt Relief Orders (DRO), Administration Orders (AOs), bankruptcy, Individual Voluntary Arrangements (IVAs), Debt Management Plans (DMPs), consolidation loans and across government.  It does not fall within the scope of this project. 
  • Removing the courts does not change the issue of ‘correct advice’ nor the issue of consistency and accuracy of advice and the regulation of the advice sector which is a completely separate workstream.  It would be sufficient and reasonable for The Service to ask, as in the courts, that the person has sought advice, but we cannot legislate as to the quality of this advice and there are limits to compelling people to take it. 
  • It was generally agreed in the group discussions that a tick box system for the debtor to say that they had sought advice would, although not the ideal solution, be sufficient.
  • Using an on-line system could provide opportunities for signposting software, which could offer the chance for guidance/information about alternatives to bankruptcy as well as the consequences of bankruptcy.
  • There were mixed views on a ‘cooling down’ period, which could offer the debtor a chance to think about whether bankruptcy is the right option and seek advice if they haven’t already.  There is currently no empirical evidence to suggest that debtors petitioning for their own bankruptcy change their minds although the time between filing their petition and their hearing does offer a natural delay. Opinion was divided between those who believed a natural delay could be built into the system by sending a debtor a hard copy of their application to sign – and also verify the debtor’s address –  and those who believed that if you get the advice right you don’t need a cooling down period.  Some thought that a cooling down period would offer protection particularly to vulnerable members of society.

Intermediaries

  • The possible role of intermediaries generated lots of debate with suggestions made that they be used in debtor bankruptcy petitions as for DROs.  For many of the stakeholders, intermediaries seem to offer a resolution to the issue of advice, information and a safety net to entry for debtors.
  • However, it was seen that introducing intermediaries in bankruptcy cases could also result in bottle-necking problems as, given the numbers involved, debtors could face delays in accessing qualified intermediaries. 
  • The Insolvency Service remains cautious on the idea of intermediaries, the issues involved in bankruptcy are likely to be more complex than in DROs, and the introduction of intermediaries may add to the overall cost of the process. Furthermore, consideration also needs to be given to the very limited capacity of money advisors to cope with this extra work.

Identity

  • During the morning presentation, parallels were drawn between divorce proceedings and the bankruptcy process – two very serious processes that change the course of people’s lives and yet there is no need for those seeking a divorce to attend court.  In addition, it was pointed out the current Insolvency Rules do not require the verification of a debtor’s identity.
  • For many stakeholders identity was of ‘low-priority’ and some even queried whether is was really an issue at all.  During the discussion, the seminar question was changed from:  ‘What safeguards can be put into place in the new scheme to reduce the possibility of fraudulent or malicious applications and be sure the person making the application is the debtor?’ to: ‘Why do we need safeguards?’ 
  • There is currently no published evidence of fraudulent applications, or the likelihood that they will happen.  There was the suggestion that the initial question in the original consultation elicited a response which encouraged people to think about identity as an issue.
  • The requirement to provide some sort of identification is common nowadays whether in online transactions or applications for bank accounts. It would therefore not be unreasonable for basic checks to be carried out for online debtor petitions although a requirement to ask the debtor to prove who they are may raise concerns of encroachment on individual’s civil liberties.
  • Nevertheless, as fraudulent applications could be made, it is important that the question is at least considered.
  • As statements of truths will replace affidavits in the very near future under The Insolvency Service’s modernisation project, it is important for stakeholders to understand that people making false statements in their application would still be open to criminal sanctions.  The Service was encouraged to hit hard and prosecute against any such offenders.

Gravitas

  • This part of the seminar asked whether removing the courts would undermine the seriousness of bankruptcy.
  • In many courts debtors are not seen so it was queried whether simply filling a form and handing it in really provides the necessary gravitas to the bankruptcy process.
  • For many stakeholders, when asked, gravitas is about making people understand that entering into bankruptcy is serious and has grave consequences. The bankruptcy process is more than just about going to court and so gravitas should be evident across the process, not just at the entry point. 
  • Education and publicising the work of the Official Receiver and making people aware of the consequences of bankruptcy before entering into the process could act as a deterrent.  There was agreement that there is very little you can do for the minority ‘lifestyle debtors’ for whom bankruptcy - whether the petition process remains in court or is online - makes no difference.
  • The suggestion was made that perhaps the involvement of the courts in the current procedures might act as a deterrent to the wrong people, those who really need the debt relief afforded by bankruptcy.  On the other hand, it might not deter those determined to abuse the system.  We need to ensure that any new system allows debtors to access advice and information to make sure the right people are going down the right debt solution route.
  • To keep bankruptcy as an option of last resort with the proposed changes the various debt resolution processes need to work together, including DMPs.  Modernisation of personal insolvency legislation should be part of a wider cross-government package to make sure people access the most appropriate solutions. 
  • The Insolvency Service should continue to examine the regimes in other jurisdictions.

General Points

  • Some stakeholders commented that care has to be taken when designing a new system that we do not just take the old model and replace it with a new one.  Instead, this opportunity could be used to improve what we already have in place.  Other stakeholders believed a completely new system is exactly what is needed.

Looking Forward

The Insolvency Service is very grateful to all those who participated in what was a very fruitful discussion.  Participants are welcome to send in further thoughts whilst The Service works on refining the proposals for reform to the debtor petition process prior to engaging in any formal consultation process.  Stakeholders are reminded that primary legislation would be needed to introduce any change to the current process."

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