Insolvency Act 1986 (Amendment) Order 2015
Baroness Neville-Rolfe
That the Grand Committee do consider the Insolvency Act 1986 (Amendment) Order 2015.
Relevant document: 20th Report from the Joint Committee on Statutory Instruments
My Lords, the order raises the level at which creditors can petition for someone’s bankruptcy from £750 to £5,000. Bankruptcy is, and should be, very much a last resort. We have been working to ensure that people can get debt advice at an early stage when they are getting into financial difficulty. The Money Advice Service has been given the task of co-ordinating debt advice provision and an independent review has recently been conducted on that role. We expect to announce the government response to this review shortly.
The Financial Conduct Authority is currently re-authorising debt management firms, which will ensure that a good service is provided to consumers struggling with debt. The national curriculum has made financial literacy statutory for the first time for 11 to 16 year-olds from September 2014—a change which I warmly welcome. The curriculum for mathematics has also been strengthened to give pupils aged from five to 16 the necessary skills that they need to make important financial decisions about mortgages and loan repayments. We have also taken steps to reduce the costs of debt solutions. We have made an order providing an increase to the debt and asset limits for debt relief orders, enabling more people to use this low-cost form of debt relief. Legislation has also been passed to allow debtors to apply directly to an adjudicator for bankruptcy, rather than to the court, to reduce the cost of the bankruptcy process for those in need of debt relief.
Forcing someone into bankruptcy for a relatively small debt is disproportionate. Bankruptcy can have a significant effect on families, and can lead to mental and physical health issues due to stress, not least when it results in the loss of the family home. Bankruptcy also restricts access to credit, can lead to loss of employment in certain professions and prevents a person acting as a company director. We therefore consulted on what the right level should be for a creditor to petition for someone’s bankruptcy. The current figure of £750 was set in 1986. There was strong support for that level to be significantly raised. Debt advice bodies highlighted that a relatively small debt can grow enormously when the costs of bankruptcy are added, such as insolvency practitioner fees and legal costs, which may run into tens of thousands of pounds.
For example, one couple with a £1,350 council tax debt eventually ended up with debts of £80,000 as a result of the process. In another example, a local authority was criticised for obtaining a bankruptcy order for a council tax debt of £1,105 without due regard for the consequences on the debtor. It should be noted that a creditor petitioning for someone’s bankruptcy is unlikely to see much of a return at all when the debt is under £5,000.
Bankruptcy cases may either be dealt with by an official receiver, when the case is straightforward or there are minimal assets, or by an insolvency practitioner, when the case is more complex. However, for both types of case, where the petition debt is below £5,000, the amount returned to creditors is very low. Once any assets of the bankrupt are realised in the bankruptcy, they are distributed in proportion between the different creditors in priority order. However, sadly, in many cases there is no dividend at all. Those returns also do not take account of the court costs and other legal fees which the petitioning creditor will face.
It is important that creditors should have appropriate options to recover a debt owed to them. For debts below £5,000, creditors still have a number of other routes to seek debt repayment, including obtaining a charging order over property or land, an attachment of earnings order if someone is employed or the use of bailiffs.
Responses to the call for evidence suggested a rise of between £1,500 and £10,000, with the highest number of responses favouring a rise to £3,000 or £5,000. In arriving at a limit of £5,000, the Government have attempted to strike a balance between the reasonable needs of creditors and the interests of debtors. I beg to move.
Lord Young of Norwood Green (Lab)
I thank the noble Baroness for her helpful introduction to this statutory instrument. It seems to be a sensible move for the reasons that she states. There is no point in forcing people unnecessarily into a bankruptcy procedure. The case that she quoted about local authorities is a worrying one. They seem to have forgotten to apply the common-sense rule and the law of diminishing returns.
I could not help reflecting on a recent Radio 4 programme which dealt with debt and which featured a young woman who had gaily acquired three credit cards, followed by a shop card. I wonder when we are going to remind banks yet again of their responsibility not to lead people into debt, although that is not in any way to say that these individuals do not have a personal responsibility. I was reflecting on the financial advice that we now give people, which is a good thing. We ought to remind them that credit card debt eventually needs to be repaid. The worst-case scenario is that, if they are unable to pay that debt, they will then move into payday loans, and we have been through that.
Therefore, the order strikes us as a sensible way forward. It is far better that people who get into debt and do not have much disposable income should be able to take a variety of routes, including debt relief orders. Other than those comments, we support this statutory instrument.
Baroness Neville-Rolfe
My Lords, I thank the noble Lord for his kind words. I very much agree with him about the need for better information, which is why I said that I welcomed the change to the national curriculum. He is also right that the banks need to be responsible. That is why it is good that we have completely reformed and tightened up financial regulation. However, there is a clear case for this important measure and I commend the order to the Committee.