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How Brexit could effect consumers in debt management plans, IVAs and bankruptcy

Wednesday, 6th July 2016

Everyone is talking about the effect of Brexit on the economy but very little is being said about the potential impact on consumers who are in either a Debt Management Plan (DMP)Individual Voluntary Arrangement (IVA) or even bankruptcy

It’s too early to say whether consumer insolvency will be affected in particular tourism bankruptcy and COMI (Centre of main interest). Tourism bankruptcy is the phenomenon whereby residents of one country move to another jurisdiction in order to declare a personal bankruptcy there, before returning to their original country of residence. This is done in order facilitate bankruptcy in a new jurisdiction where the insolvency laws are deemed to be more favourable. It is most prevalent in Europe where EU laws allow the free movement of residents to other Eurozone countries. More on Tourism bankruptcy here 

What seems to me to be clear is expenditure is forecast by many economists to rise for consumers on day to day living with higher cost for food, clothes, energy and petrol to name a few. For some families that are literally on the edge any reduction in disposable income could be the tipping point into problematic debt.   

Over the many years I’ve been in the debt management industry I‘ve seen too many people try to borrow their way out of debt, others will borrow to continue their lifestyle unaware how much their debt is increasing on a daily basis. 

Another issue is coming for those consumers already in a DMP, IVA or bankruptcy, and these people are not immune from the Brexit effect. Any reduction in their disposable income (DI) through an increase in their expenditure would put any debt remedy at risk of failing unless they seek help. When they do I would expect both the organisation helping them manage their debts as well as their creditors to be supportive. 

So what can consumers do? 

In simple terms quite a lot. We all know that any weekly or monthly payment under a DMP, IVA or Income Payment Agreement (IPA) in bankruptcy is determined though the StepChange or Common Financial Statement (CFS) set of industry set guidelines. If there is a significant change, either way in the disposable income, which causes an increase or decrease in disposable income, then creditors should be supportive. 

With DMPs - The consumer needs to communicate and inform the organisation managing their DMP and ask for a review of their income and expenditure. The amount someone pays into a DMP can be altered easily provided the increase in expenditure is proven and justified, but for those in an IVA the process could be more involved. 

IVAs - The IVA supervisor has the discretion to reduce the payments by as much as 15%, this is a good thing as it saves having to call a variation meeting to ask for creditor consent and there will be no additional cost to administering the IVA. However, if the reduction in the DI is above the 15% then a variation needs to be considered and this is where I would expect IVA firms and creditors to be supportive, this could be with the supervisor foregoing or adjusting their fees for the remainder of the arrangement to allow it to achieve a successful outcome or creditors agreeing to accept a reduced dividend return on the IVA. 

Bankruptcy - Every bankrupt is assessed with guidelines similar to those in the DMP and IVA and if they have disposable income then the individual would enter into an Income Payment Agreement (IPA).  Any significant reduction on the DI then my advice would be the same as the above, this time ask the Official Receiver (OR) for a review of the income and expenditure.   

The importance of reviewing your debt options 

I would also urge any consumer that has previously applied for a Debt Relief Order (DRO) only to be rejected because their disposable income was too high, above the £50 threshold, to seek advice again as any additional expenditure may well bring that consumer back into DRO territory. 

I’m no economist but I’m confident the Brexit will have an impact in the debt management industry as a result of more people seeking debt advice and those that need reviews as they can no longer afford their monthly payments with their chosen debt options.  The debt management industry, along with creditors needs to prepare themselves for an increase in workloads, but above all, simply be supportive, understanding and treat customers fairly.

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