Why the Free Debt Route Is Getting Shut

Ruth Callaway

Every month the Insolvency Service publishes the individual insolvency figures for England and Wales. Nobody reads them except the trade, which is a pity, because the July numbers this year say something quite strange. Personal insolvencies were up fourteen per cent on the same month last year. Individual voluntary arrangements — IVAs — were up twenty-seven per cent. Debt relief orders were down four per cent. And breathing space registrations, the sixty-day pause a person can take while they work out what to do, were down thirty-eight per cent. My guest has spent nearly forty years in this industry. Roger Wallis, welcome. The paid route is climbing, the free route is falling. Why? Because the free route hasn't got a sales team.

Ruth Callaway

That's it? That's most of it. A debt relief order costs nothing. Not a reduced fee, not a fee you can spread — nothing. The ninety pound application fee was abolished and it no longer exists. The intermediary who takes you through it doesn't charge you either. You make no payments towards your debts for twelve months and at the end of the twelve months, if nothing has changed, the debts are gone. Now ask yourself who profits from that. Nobody. There's no commission in a debt relief order. There's no introducer fee, no lead cost recovered, no fee schedule at the back of the document. So there is no advertising for it, no call centre ringing you about it, no letter through your door about it. Whereas an IVA has a whole industry standing behind it, and that industry has to eat.

Ruth Callaway

Let's take the two apart properly, because most people listening will have heard both terms and know neither. Start with the IVA. An IVA is a formal arrangement between you and the people you owe money to. You agree to pay a set sum every month, usually for five years, sometimes six. At the end of it the balance is written off. An insolvency practitioner runs it. And the practitioner is paid out of the money you put in — not on top of it, out of it. On a protocol-compliant case the fee benchmark is three thousand six hundred and fifty pounds.

Ruth Callaway

Out of the money the creditors were meant to get. Out of the money the creditors were meant to get. The Insolvency Service looked at a population of IVAs that terminated between September 2021 and September 2023, and the median case in that population had eleven thousand two hundred pounds of debt and a hundred pounds a month of surplus. On a completed IVA sixty-one per cent of everything collected went to the practitioner. The creditors got twenty-two pence in the pound. And the first money didn't reach a creditor until about the two-year mark — two years of a person paying, before a penny of it touched the debt it was supposed to be paying.

Ruth Callaway

Sixty-one per cent. On the completed ones. The same work found that around sixty per cent of take-ons were poor. Six in ten. That is not a scandal about a rogue firm somewhere — that is the ordinary output of the ordinary process.

Ruth Callaway

And the debt relief order, by comparison. Twelve months, no payments, no fee, and it's over. You apply through an approved intermediary — Citizens Advice will do it, Money Wellness will do it, and neither will charge you. The catch is that you have to qualify, and that's where the whole thing turns.

Ruth Callaway

Tell me about qualifying. There are limits on what you owe and what you own, and there is one number that matters more than the rest. Your surplus — what's left each month after your reasonable living costs — has to be seventy-five pounds or less. Seventy-five pounds. If you're at seventy-four you're in. If you're at seventy-six you're out, and if you're out, the free twelve-month route is shut and the five-year paid route is what's left.

Ruth Callaway

So the whole thing hangs on one figure on one form. On one figure that somebody else works out, on the telephone, in a conversation you didn't record. And here's the part I'd ask anybody listening to sit with for a moment. That surplus isn't measured. It's built. Somebody asks you what you spend on food, on fuel, on your phone, on the children, and they write down an amount. Put the amounts in low and the surplus comes out high. Put them in properly and it comes out low. Same person, same wages, same week — two different answers, and the difference between the two answers is the difference between owing nothing in twelve months and paying for five years.

Ruth Callaway

You've reviewed a great many of these files now. What does it actually look like when it goes wrong? It looks like a margin of twenty-five pounds. I have seen that figure so often it has stopped being a coincidence. A person's budget is assessed, their surplus comes out at a hundred pounds, and a hundred is twenty-five above the seventy-five ceiling. Note is made that a debt relief order isn't available. And when you take that same budget and test it against the published spending guidelines — the ones the whole sector uses — you find the budget was set ninety-odd pounds below the guideline figures. Put the guideline figures back in and the surplus isn't a hundred. It's nowhere near seventy-five. The route that was closed was never closed. It was pushed shut.

Ruth Callaway

Deliberately? I don't need it to be deliberate for it to be wrong, and I'd rather not guess at what was in someone's head. But I'd say this. If the error were innocent it would fall both ways. Sometimes the budget would come out too generous and the surplus too low, and the firm would have talked itself out of a fee. I have not yet seen that file.

Ruth Callaway

Are there cases where the free route genuinely isn't there? Plenty, and I say so when I find them. Somebody with real equity in a house isn't getting a debt relief order and shouldn't. Somebody earning well above their outgoings isn't either. Cars are the awkward one. The vehicle disregard is a single vehicle worth under four thousand pounds, against a general asset limit of two thousand. So a valuable car on finance closes the order even where the finance leaves no equity in it at all. And people say, right, I'll hand the car back then — except that handing it back removes the finance payment from your outgoings, and your surplus goes up, not down. On an expensive car the door is usually shut both ways. That's not a scandal either. That's just the arithmetic, and it deserves to be done honestly and shown to the person, which is a different thing from writing "not eligible" and moving on.

Ruth Callaway

What about bankruptcy? It's the word everybody flinches at. It is, and the flinching is useful to people who'd rather sell you something else. Bankruptcy isn't right for everyone and I'm not going to pretend it is. But there's a specific piece of arithmetic that gets it wrong on paper, over and over. Where a person has a surplus in bankruptcy they can be made to pay it over for a fixed period — an income payments arrangement. If the debt is under twenty thousand pounds, that period is twenty-four months. Not thirty-six. And I have lost count of the comparison tables, produced by the practitioner, that show it running thirty-six months on a debt of eleven or twelve thousand. That overstates what bankruptcy would cost that person by a third. It's shown to them on the day they're deciding. It's a finding all on its own.

Ruth Callaway

How long do people typically spend on that decision? I can tell you exactly, because the documents are electronically signed and the systems record it. Sixty-three seconds, on one file. Two minutes and five seconds on another. Two minutes forty-two on a third. That's the gap between opening the proposal and signing it — a document that commits somebody to five years of payments and several thousand pounds of fees.

Ruth Callaway

Nobody read it. Nobody could have read it. And I want to be fair here, because it isn't only the firm's doing. When you are frightened of the post and you have been frightened of it for months, and a voice on the phone tells you it can stop today, you will sign anything at all to make the fear stop. That's not stupidity. That's relief. The whole model is built on the moment somebody feels relief, and the paperwork gets signed inside it.

Ruth Callaway

Does the regulator do anything about any of this? It does, and more than people assume. There are published consent orders — the regulator's own record — against practitioners for failing to advise a debtor correctly about their eligibility for a debt relief order. In one of them the wrong advice wasn't even given by the practitioner. It was given by staff acting on his behalf, and it was still his breach. That's the important principle, and everybody in this trade ought to know it. The call handler's mistake belongs to the licence holder. There's another for a nominee failing to assess whether an IVA was even appropriate and viable in the first place.

Ruth Callaway

So the standard exists. The standard exists and is enforceable and has been enforced. The difficulty is that it's enforced case by case, after the event, and the sanctions are published for twelve months and then the page comes down. Meanwhile the figures we opened with keep going the way they're going.

Ruth Callaway

We opened with breathing space down thirty-eight per cent and I want to come back to it, because that's the biggest fall of the lot. What is it, and why is nobody using it? Breathing space gives you sixty days in which the interest stops, the charges stop and the enforcement stops. Nobody can chase you for sixty days. It doesn't write off a penny and it isn't meant to — it's thinking time. And thinking time is the one commodity this industry cannot sell you.

Ruth Callaway

Because in sixty days you might work out what you actually want. You might ring somebody else. You might do the sum. You might read the document, which takes rather longer than sixty-three seconds. The whole acquisition model runs on the fortnight when a person is at their most frightened, and a sixty-day pause is a fortnight that doesn't convert. So it doesn't get mentioned. Down thirty-eight per cent, in a year when insolvencies rose fourteen.

Ruth Callaway

The other thing I hear from people is that an IVA at least ends. Five years and it's done. If it completes. Around a third don't. And when one fails, the money that's already gone in doesn't come back and it hasn't gone where people assume. I've reviewed terminated arrangements where the client had paid in eleven hundred pounds against a projected seven and a half thousand, and better than three-quarters of that eleven hundred had been taken in fees and disbursements. Another where eighty-two per cent of everything collected went the same way. The person walks away owing very nearly what they owed at the start, minus a couple of years of payments and any faith they had left.

Ruth Callaway

And they're then told they're back to square one. They're not back to square one. They're behind it, because the arrears built up while they were paying somebody else. And that's the point at which a lot of people simply stop opening the post again — which is where they came in.

Ruth Callaway

For somebody listening who's in an arrangement now, and who's just done that sum in their head and doesn't like the answer — what's the first thing to do? Get the file. All of it. You are entitled to what was said and written about you, and that includes the call recordings from the day you were signed up. Ask what your surplus was assessed at and how it was made up, line by line. Ask what you were told about a debt relief order, and if the answer is that it was discussed and you weren't eligible, ask what figure you were said to be over the seventy-five by. If the answer is twenty-five pounds, you now know what to look at next.

Ruth Callaway

And if somebody wants to check the basic facts rather than take our word for it? The Individual Insolvency Register is public and free and searchable, and every arrangement in England and Wales is on it. The Insolvency Service publishes the statistics and the sanctions. None of it is behind a paywall and none of it requires you to give your telephone number to anybody. Start there.

Ruth Callaway

Last question. Nearly forty years in this industry, and you've spent them on the selling side as much as anywhere. Why turn round now? Because I know exactly how the sums are put together, and I know they can be put together the other way. There's a version of this where somebody sits down with a person's actual figures, works out honestly which of the four routes leaves them best off, and tells them — including when the answer is that they're already in the right one, which it sometimes is. That version doesn't take any longer than the version we've got. It just pays a good deal less. And that, I think, is the whole of it.

Ruth Callaway

Roger Wallis. Thank you. Thank you, Ruth.