A review of most insolvency approaches demonstrates a basic lack of providing balanced incentives and encouragement to consumers to repay creditors when they are involved in bankruptcy.

 

The chronic complaint of creditors is they feel that consumers fail to make a maximum effort at repaying their debt. In fact, in the UK the average return to creditors in bankruptcy is less than 1% of the outstanding debt, in a debt management plan it is about 19% of the debt over an extended period of time and in the individual voluntary arrangement (IVA) approach it is about 36% over a five year period, however due to recent creditor changes with the IVA repayment proposals we should start to see that number slip lower.

 

In a bankruptcy or an IVA the consumer has little incentive to devote maximum effort to repay their debt in the shortest amount of time. An alternative approach to accelerating consumer debt repayment would be to provide a target based on total amount rather than time that has to be met for a discharge of all remaining debt.

 

In bankruptcy where a debtor might have sufficient funds to repay the debt over a three year period and in an IVA in a five year period the consumer would be more likely to repay their debt in a much shorter period of time if the consumer and creditor came to an agreement at the beginning of the repayment agreement as to what the target amount to be repaid is.

 

Consumers do better to achieve goals when they can see the finish line and have something specific to reach for. In this incentivised repayment approach a consumer is more likely to work hard, devote more funds to and meet his obligations as early as possible to obtain a release from the remaining debt. If it is determined that a consumer must repay 10,000 monetary units over a three year period and a consumer with maximum earning effort manages to repay that debt over a two year period, both the debtor and creditor have received a benefit.

 

Consumers that repay their agreed amount much earlier to their planned discharge date, benefits the creditor. The creditor will receive their funds back faster, will be able to count on more debtors be self-motivated to repaying for the discharge of the remaining debt, would be less attracted to selling delinquent debt quickly for lower returns and more debtors would be motivated to improve their position in life and society, giving the economy a fresh start.

 

Consumers that proved their ability to repay their debt in a timely manner could receive new accounts with the same creditor. Creditors today spend about a significant amount of money to acquire new customers while they discard and abandon debtors who have fallen on hard times and found themselves in trouble but repaid a fair and reasonable amount. Creditors are missing a distinct opportunity to win the allegiance of customers for life when they are encouraging and understanding in the bad times.

 

Using this incentivised approach for debt repayment would lead to fewer court cases for judicial bankruptcy and create more attraction for debtors to seek binding, fair, reasonable and sustainable extra-judicial way to repay their debt.

 

Because the debtor would have a higher level of self-motivation under this approach the cost of administrating these plans would be less and the cost savings could be passed on to the creditor in the form of less professional and administrative fees to chase past due debtors for payment.

 

Under the current bankruptcy strategy the consumer is not given support or an incentive to provide maximum effort to repay. The diminished effort leads to a higher state cost, welfare, support, etc., along with delaying the consumers return into mainstream society. While in a burdened debt repayment position the consumers, family and children continue to suffer from social exclusion as creditors attempt to manipulate repayment to absorb as much as possible.

 

Conclusion

 

Rather than looking for more punitive ways to force consumers to repay their debts under bankruptcy which increase the social cost, reduce the effort of consumers and create more burden on courts and creditors to police judicial repayment plans, this paper presents an alternative approach that would reward consumers for repaying the target level of repayable debt in the shortest period of time and would increase the creditors overall return. This approach seems to provide a win-win solution for both debtors and creditors.