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What can we learn from the history of regulation of small sum high-cost lending? Anne Fleming, in a thoughtful, carefully researched, and stimulating book, City of Debtors examines the history of regulation of ‘fringe finance’ in the US since the early twentieth century. Fleming argues that Americans are torn between concerns to protect working class and poor debtors from exploitation by high-cost credit, while still permitting access to credit, and allowing individuals to control their own financial lives. She highlights a number of continuing themes in the history of credit regulation, including regulatory arbitrage and reforms as often representing a coalition of reformer and lender groups.
Her narrative begins with progressives’ concerns at the beginning of the 20th century with salary lenders (modern payday lenders) who provided short term loans to urban workers usually in contravention of the usury laws. In response to public concern, reformers collaborated with ‘high-road’ lenders to develop the model Uniform Small Loan Law with generous price caps, as a legitimate method for providing small loans to the working class. The price caps reflected the views of reformers (The Russell Sage Foundation) that it was inherently costly to offer small loans to poor consumers and that this would attract capital to the industry. Licensing of a limited number of lenders gave stability to the industry, reducing incentives for excessive competition.
This reform represented a confluence of lender and reform interests, with lenders interested in stability and legitimacy and indeed viewing the law as constituting the industry. In order to deter unlicensed loan sharks from undercutting the law, severe sanctions were introduced for failure to comply with the requirements of the Act, including the unenforceability of any credit contracts. The need for such strong sanctions was based on the theory that low income individuals would be unlikely to challenge loan sharks through the courts.
Regulatory arbitrage and regulatory circumvention existed throughout the twentieth century. The time-price doctrine in US law (the price depending on whether the purchaser paid cash up front or over time) historically exempted sales finance from the usury law resulting in irrational distinctions between different forms of financing purchases, and offering incentives for the creation of fake instalment sales to get around usury laws. Although small loan interest rates were regulated from the 1920s , sales finance was relatively unregulated, and often did not disclose the costs of lending. Certain parts of the sales finance business became associated with practices similar to those which stimulated the English Hire Purchase Act 1938. Known as ‘chain repossession’ in the US and the ‘snatch back’ in the UK, sellers repossessed goods when individuals fell behind on a repayment notwithstanding that borrowers had repaid most of the debt, with the seller subsequently reselling the goods at a profit. The seller in the US might also take a wage assignment against the borrower which if enforced could result in loss of employment. Regulation of these practices was often justified as protecting individuals from becoming a public charge on the state.
In later eras, rent-to-own and leasing companies would attempt to circumvent the protections in retail instalment sales law. The Federal structure of the US offered further opportunities for arbitrage. Thus some early salary lenders in New York structured their loans to be governed by the law of the state of Maine which did not have usury ceilings. And in the 1970s, a bank successfully convinced the Supreme Court in Marquette National Bank of Minneapolis v. First of Omaha Service Corp. that banks, by chartering in a state without usury ceilings, could export that rate throughout the country.
The book provides a rich analysis of the subsequent decline of the Small Loan law and the development of credit law as part of the ‘law of the poor’ in the 1960s, when credit exploitation of black and minority consumers, often through door-to-door selling, was attacked under the unconscionability doctrine (see here )and the Supreme Court used the due process clause to establish minimum standards in credit enforcement. But the book also demonstrates the limits of litigation and the need for legislation, as well as the difficulties of policing the ‘fly-by-night’ operator. The book concludes by discussing the rise of the check cashers and modern payday lenders which have, according to one payday lender cited in the book, become “an adjunct of the welfare system”.
Credit has historically functioned as an informal safety net in the US (see here) with a reluctance in the US to provide state subsidised lending for the poor (although the US tax system was used to provide generous tax subsidies for middle class borrowers). Fleming highlights a belief among some groups that state provision might undermine an individual’s dignity, and result in the ‘stigma’ of welfare. Fleming concludes that the contemporary challenge for policy makers is how to regulate small sum lending in ‘a world in which welfare and small sum credit are the two sturdiest life rafts available to those drowning in the choppy waters at the edge of the economy’.
The book is a valuable contribution to debates on high cost lending even if it does not provide any solutions. It might have benefited from further engagement with theories of the role of consumer credit in contemporary capitalism. For example how would this history of high-cost credit fit with Soederberg’s description of the US as a “debtfare state” with credit as a form of secondary exploitation of the surplus population?
What relevance does this US history have for the UK?
Many of the themes identified also can be identified in UK credit history such as regulatory arbitrage and legislation representing a confluence of industry and consumer groups. In the 1950s some finance companies attempted to avoid the bite of regulation by constructing their hire-purchase agreements as hires. The recent rise of auto log-book loans exploits a loophole in protections for consumers against seizure of their goods. Reforms which represented a congruence of industry and consumer interests include the 1938 Hire Purchase Act, the outcome of a Bill promoted by Toynbee Hall (see here) an organisation working with poor debtors and the Hire Purchase Trade Association. The Consumer Credit Act 1974 was supported by both finance groups and consumer groups. In both cases these Act gave legitimacy to the credit industry as well as providing consumer reforms.
The UK never developed a Small Loans Law, although social reformers such as Dorothy Keeling urged Parliament in the 1920s to follow the US model as a solution to problems of illegal moneylending in large industrial towns such as Liverpool.
The UK also faces the contemporary challenge of regulating high-cost credit in a shrinking safety net where the poor continue to pay more (see the recent Office of National Statistics study here). The Financial Conduct Authority has capped the cost of payday loans, promises to cap the cost of logbook loans, but is not certain whether to regulate the price of home credit and overdrafts. Even with price caps, credit remains costly for individuals in these markets. The recent Treasury committee report did not identify any ‘silver bullets’ for addressing this question, although more secure employment and reasonable housing costs might be a start. It is not obvious what is the solution. The suggestion that Housing Associations might provide lower cost appliances to compete with the rent-to-own companies merits further study. The welfare state in the UK did historically attempt to protect low income individuals through social grants, and subsidies, but increasingly individuals are being left to the credit market to make ends meet.
Consumer credit law is complex partly because of regulatory arbitrage and historical attempts at circumvention. Given the incentives to circumvent regulation and the assumption that individuals would be unlikely to bring actions for contraventions of rules, legislators often inserted strong sanctions in laws such as the Moneylenders Acts, similar to the Uniform Small Loans Law. Undoubtedly this had value but it also provided opportunities for individuals to reject agreements on technicalities. Given the seeming individual injustice in these cases, judges were reluctant to apply the letter of the law resulting in tortuous interpretations. Successive generations have attempted simplification. This was the objective of the Crowther Committee which deplored the technical morass of interpretation under the earlier Moneylenders Acts. But the Consumer Credit Act 1974 carried forward significant complexity which resulted in litigation often focused on technicalities rather than substantive fairness. The FCA developed its high level principles such as treating customers fairly as a response to the technicalities of detailed rules, inviting firms to embed these in their products and treatment of consumers. The Payment Protection Insurance scandal indicated the limitations of this strategy with the finding that managers in many cases received substantial commissions for selling insurance policies to consumers.
Finally there is the role of competition. Contemporary reformers generally assume that vigorous competition in credit markets is good for consumers. Measures such as the Uniform Small Loan Law restricted competition and were criticised subsequently for doing so. In the UK the finance houses in the 1950s ran a cartel which limited competition. The Crowther Committee believed that vigorous competition would benefit consumers and reduce the price of credit. This had some truth. However, historical evidence does suggest that increased aggressive competition in credit markets often leads to a lowering of credit standards and a search for methods of increasing profits through exploitation of consumer biases. The PPI scandal in the UK occurred in a highly competitive market where competition on price, among other factors, created incentives for firms to find other methods of maximising profits for shareholders through the highly profitable sale of credit insurance.
The Scottish government has once again trumpeted the success of its Debt Arrangement Scheme (DAS) in a press release earlier this week. The Minister for Business, Innovation and Energy, Paul Wheelhouse, states that it ‘is the only statutory debt management programme in the UK and we are rightly proud of its success in providing a viable option for those seeking to pay their debts without plunging into insolvency’. Lord Wilf Stevenson, chair of Step Change Debt Charity also lauds the Scottish scheme as an example of how things work better in debt management North of the Border (see here) and the Treasury recently completed a consultation on the possible introduction of a similar scheme in England and Wales.
But what evidence exists to support these optimistic views on the Scottish scheme?
The Scottish Debt Arrangement Scheme (DAS) is a statutory debt management plan. Its benefits include a stay on individual enforcement action by creditors, the freezing of interest and penalty fees and the possibility of a debtor retaining a home. Plans can be imposed on creditors by the administrator (the AIB) if creditors do not consent, provided the plan is fair and reasonable. Individuals make a single payment through a payments distributor (one of four private sector organisations awarded the contract by the government) who can charge a fee of 8 percent. An individual must consult an approved money advisor before commencing a DAS. Both public and private advisers now act as intermediaries with the majority of applications now handled by private advisors (dominated by a few specialists) who can charge a fee. Debts can only be written off after 12 years, if seventy percent of outstanding debts have been paid. Data from 2012 indicate that they last on average 6 years 8 months. Fifty-four percent of users are female with an average age of 44 a median level of debt of £12, 913, making an average monthly payment of £238.
The Scottish government highlights the benefits of the plans for creditors, claiming a 90 percent return rate. However, this is misleading since it assumes that all plans are completed. Data (see Table below ) which I obtained from the Scottish Accountant in Bankruptcy suggest that at least 25-30 percent of files are revoked and the dominant reason for revocation is failure to pay when due. Thus of the 3,939 cases commenced in 2012-13, 1139 had been revoked by 2017. In addition, given the long time scale of these plans the amount recovered should be discounted and it is possible that some of these debts have already been written off by creditors and bought by debt buyers who will profit from any recovery.
These long term debt plans may be producing modest income for individual creditors but one must question whether it is socially beneficial to have individuals shackled to a repayment plan for so long. The Scottish government is committed to the principle of ‘can pay should pay’ and Fergus Ewing (then the relevant Minister) celebrated the fact that many individuals were choosing the longer road of the DAS because it demonstrated that ‘most people want to pay off their debts when they can’ (at 25929) and that ‘bankruptcy should not be an easy option’ (same). However these comments neglect the growing international literature (see discussion here and here ) on the economic and social benefits of bankruptcy providing a swift fresh start for debtors. There is a danger of increasing the already significant social stigma associated with bankruptcy when there should be greater recognition of its value as a safety net in contemporary economies with high levels of household debt.
Individuals generally do want to repay their debts but many individuals who are in debt trouble suffer from continuing problems in terms of unstable employment. Long term debt problems have effects on the health of individuals. Behavioural studies suggest that individuals are often over-optimistic and will underestimate the difficulties of maintaining repayments over a long period. Their credit rating will continue to be low after they complete the plan and is unlikely to be better than if they declared bankruptcy.
Unfortunately almost no systematic studies exist (see here) of the experience of individuals who have succeeded or failed on DAS (and ideally a control group who could have but did not choose to undertake a plan). The 2012 study did suggest that there was a trend among young individuals to take out a DAS to repay smaller amounts of debt and a DAS could be useful for an individual caught up in high cost credit problems. So the DAS may be useful for some debtors. Or it may represent simply a benign state sanctioned collection agency and, given the long length of the repayments–almost a form of ‘debt peonage’.
But once again we encounter the failure by governments to develop good evidence based policy in the area of bankruptcy. The danger is that a form of DAS (with its “breathing space”) is layered on to the unnecessarily complex system of personal insolvency alternatives in England and Wales without a reappraisal of the existing system.
Scottish DAS Agreements: Closed, Live and Revoked
Source: Scottish Accountant in Bankruptcy.
This post is a video. Here at: https://www.youtube.com/watch?v=_sCAG3Cn0O0&index=24&list=PL_voamVqJ_ZyVoZdGh4ov5u1PseEJxwEX
Damning report on debt management advice by Financial Conduct Authority–need for comprehensive review of insolvency alternatives
The FCA published on Thursday 25th June a damning thematic review on the quality of debt management advice, concluding that the quality of advice was of an ‘unacceptably low standard’. Advisors often did not make an adequate assessment of individuals’ revenues and expenditures or give balanced information about insolvency alternatives. For example, they often reinforced customers’ initial reluctance to consider bankruptcy and played on misconceptions about bankruptcy to deter them from this alternative. The FCA reported ‘many instances where customers were recommended very long-term debt management plans (often many decades…) when debt relief solutions are likely to have been more appropriate but adequate information and advice was not provided”(para 4.55). In one case a debt advisor failed to correct a debtor’s misconception about the effects of bankruptcy and recommended a debt management plan lasting 125 years! Firms often had incentive structures for selling debt solutions.
The study was primarily of the fee-charging debt management industry but it was also critical of those firms providing free debt advice to consumers, indicating that there was ‘scope for material improvement’.
These findings are perhaps not surprising given the continuing concerns expressed about practices by some debt management companies by Parliamentary Committees and the Office of Fair Trading. Studies in other countries have raised similar concerns. In a recent article Stephanie Ben-Ishai and Saul Schwartz studied how not-for-profit Credit Counselling Agencies in Canada gave advice to individuals with debt problems. Using carefully scripted mystery calls to credit counselling agencies Ben-Ishai and Schwartz found that the agencies surveyed did not present the options for dealing with a debtor’s financial in a complete and impartial manner and did not present bankruptcy as a viable option. The focus was on ‘fitting the caller into the requirements’ of a debt management plan. They concluded that although the agencies portray themselves as debtor-friendly they operate rather as collection agents.
A fundamental concern in England and Wales raised by the FCA report is whether these practices by debt management companies are undermining public policy on debt relief by steering individuals to debt management plans rather than permitting individuals to make a ‘fresh start’ through bankruptcy or a debt relief order and becoming productive again. Joseph Spooner and myself have commented elsewhere on whether England and Wales has struck the right balance between the wide variety of repayment plans, sometimes lasting many years, and the straight discharge of most debts. Almost one-third of Individual Voluntary Arrangements fail to complete. Many individuals may choose a repayment plan because they assume it will be better for their credit rating (and they may be able to retain their home) but credit reference agencies make little distinction between bankrupts and those who have been on repayment plans. The complexity of the English system with its many alternatives also creates difficulties for individuals choosing the best option, and increases the power of private and public intermediaries in the system, whose financial incentives may not align with public interest concerns.
Several countries (Canada, US, Scotland) now include debt counselling as part of the individual bankruptcy process but evidence is limited as to its beneficial impact.
Many official inquiries have supported the integration of counselling in the debt enforcement system. In the 1960s and 70s counselling was justified by the perception of a debtor as needing assistance in managing her financial affairs and possibly having wider problems in coping with life. The English Payne Committee (1970) proposed a social service office for debtors as part of a state enforcement office based on ‘abundant evidence that many debtors incur and fail to pay their debts because they are inadequate personalities or irresponsible in managing their affairs… They need to be assisted to financial health and stability.” (para 1210) Social workers would ‘perform for financially incompetent or inadequate or irresponsible debtors, the functions which are discharged for more successful members of the community by bank managers, accountants or solicitors’ (1216). The influential Brookings Commission study (1971) in the US proposed that financial counselling should be available to all debtors after finding that 31 percent of debtors attributed their problems to poor debt management, and the US Bankruptcy Commission(1973) proposed that access to bankruptcy should be dependent on a debtor receiving counseling by the new administrative agency which would administer the bankruptcy process. The Bankruptcy Reform Act 1978 contained no formal requirement for counselling. The US National Bankruptcy Commission in the late 1990s endorsed the introduction of counseling on a voluntary basis.
Canada pioneered in 1992 the legislative introduction of two counseling sessions during bankruptcy for individual bankrupts (see here). The objective was to prevent repeat bankruptcies and to further rehabilitative goals of behavior modification. The Insolvency regulator (Office of Superintendent of Bankruptcy), debt counselling agencies and the Canadian Bankers Association supported its introduction. In Canada the trustee (or their delegate) must now: (1) make a pre bankruptcy assessment outlining options including that of a consumer proposal (repayment of a portion of debt usually over three years), (2) provide an initial counseling session shortly after bankruptcy is declared entitled consumer and credit education and (3) a second session shortly before discharge which normally takes place nine months after the declaration of bankruptcy. Counselling is financed by a fee which comes out of the bankruptcy estate– $85 for each stage of counselling-usually made from income payments by bankrupt. Ninety percent of the sessions last under one hour. Counselling is a condition for receiving a discharge. The current Directive (OSB 1R3) defines it as ‘educating debtors on good financial management practices, including the prudent use of consumer credit and budgeting principles, developing successful strategies for achieving financial goals and overcoming financial setbacks and where appropriate making referrals to deal with non-budgetary causes of insolvency (ie gambling, addiction, marital and family problems)’.
Has the Canadian system of counselling achieved its objectives? It is difficult to measure this rigorously because one ideally needs a control group who go through the process without counseling. In early reviews bankrupts generally were favourable in their assessments of counseling. But does counselling change behavior or result in fewer repeat bankruptcies? The only rigorous study of the Canadian system using a control group, conducted by Saul Schwartz and published in the American Bankruptcy Law journal in 2003, concluded that counseling did not lead to ‘any appreciable improvement in future creditworthiness’ and ‘has little effect on repeat bankruptcies in the first five years after an initial bankruptcy filing’. In Canada the overall repeat filing rate has increased from 10 percent in 2002 to 15 percent in 2011 and 16 percent in 2012. Notwithstanding these data a recent evaluation in 2013 by the Canadian Department of Industry argues that counselling has a positive impact because ‘debtors found the sessions useful’. The report admits that ‘determining the effectiveness of mandatory counseling is challenging because it is difficult to disentangle the results of two counseling sessions from the broader changes that occur in a bankruptcy or insolvency’. The study suggests some short-term changes in understanding and behavior by debtors and notes that repeat bankrupts were slightly less likely to cite overuse of credit as a reason for bankruptcy. But the study is hardly a ringing endorsement for mandatory counselling for all bankrupts.
In the US the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) introduced mandatory counselling at the pre-bankruptcy stage as an eligibility condition for filing for bankruptcy and also required bankrupts to undertake a financial education course during bankruptcy as a condition of receiving a discharge. Pre-bankruptcy counselling is premised on the assumption that debtors turned too quickly to bankruptcy as a solution for their problems. The Act is vague on the contents of the financial education course but the Federal US trustee has promulgated rules which indicate that the course must include budget development, money management, wise use of credit (including distinguishing wants from needs), consumer protection, and coping with unexpected financial crisis. The financial education course must last a minimum of two hours but may be completed in person, over the phone, or through the Internet.
Michael Sousa in a recent article surveys existing pre- and post- BAPCPA studies of voluntary counselling in bankruptcy. He also presents the results of a qualitative study of the effects of the BAPCPA counselling requirements. Most debtors did not find the courses helpful. Pre-bankruptcy counseling was just ‘jumping through hoops’. It did not have the consequences hoped for by Congress–where debtors rethought their decision and entered a debt management plan. Rather it either confirmed the correctness of an individual’s decision to file for bankruptcy or helped to allay any fears about declaring bankruptcy. Most debtors thought that a two-hour financial education course was not enough to provide long-term effects and in any event was often inappropriate since many individuals filed for bankruptcy because of external economic changes unrelated to financial capability. Sousa concluded that the existing BAPCPA counselling requirements are ‘by and large misguided and are in desperate need of overhaul and reform’.
Scotland recently introduced counselling in the 2014 Bankruptcy and Debt Advice (Scotland) Act which Act will, according to the relevant Minister, Fergus Ewing, deliver ‘the most significant change to the bankruptcy process in Scotland for a generation and take us closer to making the financial health service a reality’ (more on this claim in a subsequent blog). Individuals must consult a money advisor before obtaining access to any statutory debt relief. The policy objective is that of ensuring that individuals are aware of all debt relief options, although I suspect that it is partly motivated by the objective of ensuring that individuals do not enter too easily into writing down debt rather than the statutory Debt Arrangement Scheme which will generally require full repayment (again more about this on a further blog). Financial education during bankruptcy is not mandatory for all debtors. Only repeat bankrupts within the previous 5 years, or debtors subject to a bankruptcy restriction order made against them must undertake a course. In other cases a trustee may refer a debtor to a financial education course where ‘the trustee considers that the pattern of behavior is such that the debtor would benefit from a financial education course or the debtor agrees to undertake a financial education course.’ The Scottish legislation recognises that counselling is not necessary for all debtors. This suggests that legislators do learn something from comparative experience, since they seemed to be aware of the criticisms of the US provisions.
England and Wales rejected counselling in the 2002 reforms primarily because most groups consulted opposed its introduction. Debtors may therefore experience a variety of advice before and during insolvency, depending on whether they seek advice in the public sector through Citizens Advice Bureaux, non-profit debt counselling such as Step Change, or a private intermediary.
The UK is sometimes contrasted with continental Europe where it is assumed that a more ‘social’ approach exists to counselling debtors. But this is not the case. Counselling is not an integral part of the French process. Although debt counsellors play a central role in Germany, the large demand for their services means that they function more as processors rather than being able to provide substantial financial counselling. In Sweden, a recent official report was very critical of the standards of debt counselling which are operated by municipalities.
Debt counselling in bankruptcy is a programme which in the abstract can attract a broad support. It is a policy around which a coalition of creditor, consumer and debt counselling interests can agree, and for regulators it gives a sense of purpose to the bankruptcy system–so the Scots view it as part of a ‘financial health system’. It is likely therefore to continue to be attractive but experience suggests an unwillingness by governments to invest significant resources in the project.
The credit counselling requirements are often based on the assumption that bankruptcy is a consequence of imprudent or unwise use of credit or the need for individuals to adapt their credit behaviour to more desirable norms. But this is clearly not the case for many debtors who are subject to adverse changes of circumstances, unforeseen health costs or small business failures.
The Insolvency Service released earlier this week statistics on Individual Voluntary Arrangements which provide over-indebted individuals the opportunity to repay over time a portion of their debts. Originally designed for individual business debtors, enterprising accountants transformed IVAs into a mass-produced consumer remedy in the early 2000s. In a recent submission to the Insolvency Service, Joseph Spooner and I raised questions about the extent to which IVAs serve the public interest. The recent IVA statistics underline these questions. The statistics indicate increasingly long IVAs of at least 5 years (the original model envisaged a three-year repayment plan). Only 33 percent of IVAs registered in 2008 had completed by October 2014. Over 35 percent of plans begun that year were terminated with the possible consequence of a subsequent bankruptcy for the debtor. These statistics are on their face troubling and demand further investigation. Perhaps the longer plans reflect the fact that individuals miss some payments because of a change of circumstance such as a period of unemployment or plans are modified. But these individuals might have been better to declare bankruptcy initially and make a swift fresh start, benefiting the economy from greater productivity and increased consumption.
Unfortunately no systematic empirical studies exist in England and Wales of the economic and social costs and benefits of IVAs. No studies have attempted to assess debtors’ experiences of IVAs and whether they have a genuine fresh start at the end of five years. Policy making on IVAs has been effectively privatised. The terms of IVAs are determined through private bargaining between creditor and debtor, against the background of a ‘protocol’ developed by bankers and insolvency professionals with modest input from public interest groups.
The Insolvency Service review discussed in a previous blog also raised the possibility of reforms to the Debt Relief Order procedure.
Debt Relief Orders are a transplant from New Zealand, which first promoted the so-called ‘no asset procedure’ in 2002. The English Department of Constitutional Affairs floated the idea of the DRO in 2004. Its objective was to provide a low cost alternative for individuals who could not pay their debts but who also could not afford bankruptcy (see here). It was viewed as an alternative for individuals currently using the administration order procedure. Evidence indicated that many of this group, primarily women, were unemployed or living on a low-income. They could not afford the bankruptcy fee and perhaps feared its stigma. The DRO would, according to the Department, provide a less stigmatizing alternative.
The DRO is a highly targeted debt relief option, permitting a discharge of most unsecured debts after 12 months. It is limited to individuals with £15000 in unsecured liabilities, less than £300 in assets and no more than £50 in surplus income. It has certain attractive characteristics. It is an administrative process initiated online, uses ‘trusted intermediaries’ (e.g. CABx) to screen debtors and attempts to reduce stigma by not using the term bankrupt (although the media sometimes call it bankruptcy lite). It also builds in safeguards. It can only be exercised once every six years and there is the possibility of sanctioning debtors under a Debt Restriction Order. Because England insists on a ‘user pay’ model of bankruptcy, applicants must pay £90 to access the procedure.
Preliminary evaluation by the Insolvency Service in 2010 of the demographics of users indicates that the majority of users are unemployed (48% in 2013-14) at the time of entry. Women are disproportionately represented (63 % compared with 51% in the population). More under 25s (12 percent compared with 5 percent in population) use the procedure and also slightly more in the over 55 population. Almost 50 percent of users are single, a larger percentage than in the bankrupt population.
The central question is whether the procedure achieves its primary goals of financial rehabilitation and avoiding financial exclusion. Unfortunately the Insolvency Service cannot answer this question because of the absence of data. Although it was tasked with monitoring the success of the DRO, cuts to the resources of the Service mean that it cannot undertake this type of research. Evidence based policy is therefore not possible and the Agency is reduced in its consultation to asking ‘stakeholders’ about their views on this question. This approach hardly substitutes for systematic research on key issues such as the ability of individuals to get credit again, manage precarious finances, not suffer discrimination from landlords, or face difficulties with work. We might hypothesise that the DRO would reduce stress and the mental and physical health effects of debt, and possibly costs to the Health Service. Individuals may however be deterred from taking work during the 12 month period since this might result in a revocation of the order. If this is the case (the Insolvency service provides no hard evidence on this point) then a 6 month period might be more appropriate as adopted in the recent Scottish Bankruptcy Act amendments (see here).
New Zealand assessed its procedure in 2011 (see here). The users of the procedure have a similar profile to English debtors, with an overrepresentation of women, high levels of unemployment and reliance on social security. The review found some real benefits from the procedure: individuals found it easier to manage their household finances, and it had a positive impact on health and family relationships. However debtors on social security continued to have problems and there were some negative aspects such as the inability to obtain new credit, some debtors losing their jobs because of the order, and some landlords refusing to accept them as tenants.
A primary drawback of the process is its limited availability. A swift administrative process should be more widely available. Most bankrupts do not have significant assets or substantial surplus income. About two-thirds of bankrupts in England in 2013-14 had less than £2000 in assets and less than £30000 in debts. They are generally unfortunate in having suffered a change of circumstances or miscalculated finances in an economy where high levels of debt are the norm. Few are trying to act opportunistically. The court process is itself increasingly administrative in character and will be replaced by administrative adjudicators once current reforms are implemented in 2016. There is modest investigation by the Insolvency Service of the majority of bankrupts. And an individual is discharged after 12 months. The main difference is the cost of bankruptcy with individuals having to pay over £700 in costs to access bankruptcy.
Other countries such as Canada have swift administrative processes for individual insolvencies. The great majority of Canadian bankruptcies are processed through a summary procedure (where the realizable assets of an individual are not likely to exceed $CAN 15000) with an individual being discharged after nine months.
Finally, the DRO may not solve the problems of those living in precarious employment or on the margins of society and more research is needed on the longitudinal effects of bankruptcy and DROs in providing a ‘fresh start’. It is a pity that the Insolvency Service was unable to undertake such a study.