In the complex landscape of personal insolvency, the nuances of various mechanisms play a pivotal role in shaping the financial future of those navigating unmanageable debt scenarios. As we delve into the intricacies of formal insolvency frameworks, our attention is drawn to the United Kingdom, a jurisdiction offering a compelling comparative study for Australia.

Understanding Australia's Framework

Australia's formal personal insolvency framework comprises three core mechanisms: Part IXs, Part IVs, and Part Xs. Each mechanism targets specific levels of indebtedness, uncommitted income, and assets within the cohort of consumers facing insurmountable debt. Bravure has undertaken a comprehensive exploration of international markets, seeking valuable comparisons to shed light on the diverse mechanisms governments employ to assist consumers in financial distress.

Insights from the UK Market

The UK emerges as a fascinating case study due to its broad customer coverage achieved through a suite of mechanisms. To illustrate this, Bravure has developed a visual representation that simplifies the conceptual alignment of various customer profiles with existing insolvency tools. The UK's mechanisms, as depicted, cover a more extensive spectrum of customers, especially those willing and able to repay a portion of their debts but lacking the capacity for full repayment.

Comparative Framework: Australia vs. UK

The visual representation underscores the alignment of the UK mechanisms with a diverse range of customers, from those with a complete debt repayment orientation to those seeking complete debt relief. Notably, the UK's mechanisms cater to individuals with substantial capacity to repay, as well as those with minimal capacity, offering a nuanced approach to insolvency.

Supporting this observation are the significantly higher personal insolvency uptake rates in the UK compared to Australia. For instance, in H1-2023, UK personal insolvency volumes were 11 times larger than Australia's, despite the UK's population being only three times larger.

Deconstructing the UK Mechanisms

Let's examine the key mechanisms in the UK's insolvency arsenal:
Debt Management Plan (DMP): An informal insolvency solution providing arrangements negotiated with creditors and managed by a third party. However, it offers only interest relief, without full debt relief.

Individual Voluntary Arrangement (IVA): Aligning closely with Australia's Debt Agreement, the IVA in the UK lacks a term cap, offering flexibility for those seeking an alternative to bankruptcy.

Debt Relief Order (DRO): Providing a lifeline for individuals with moderate levels of debt and minimal capacity to repay, the DRO offers an alternative to bankruptcy with complete debt relief.

Bankruptcy Order (BO): Comparable to Australia's Bankruptcy mechanism, the BO in the UK stands out with a default discharge period of one year.

In conclusion, the UK's approach to personal insolvency, with its nuanced mechanisms covering a broader customer spectrum, offers valuable insights for Australia. As we navigate the ever-evolving landscape of insolvency, considering international best practices becomes imperative, and the UK's success in achieving higher uptake rates underscores the importance of a comprehensive and tailored approach to address the diverse needs of individuals facing financial hardship.

Case Study

Background

• The Australian formal personal insolvency framework is made up of three core mechanisms, Part IXs, Part IVs and Part Xs
• These mechanisms each have specific ‘target markets’ in terms of the levels of indebtedness / uncommitted income / assets that they intend to capture within the cohort of consumers facing an unmanageable debt scenario
• We have found that international markets are able to provide useful points of comparison regarding the different mechanisms that may offered by the government to assist customers facing these scenarios and the cohorts of consumers targeted by each
• We have identified the UK market as a particularly interesting comparable to consider given the broad customer coverage that the UK’s current suite of mechanisms is able to achieve

Details

• We have developed the below visual to provide a simplified conceptual representation of the various cohorts of customers who may seek to utilise a formal insolvency mechanism (ranging from those with a complete debt repayment orientation through to those with a complete debt relief orientation, as well as those with substantial capacity to repay through to those with minimal capacity to repay) and which presently available tools are most closely aligned to the various portions of this customer spectrum

• Per the above, the features of the UK mechanisms can be seen to cover a greater spectrum of customers, in particular, those with a willingness/ability to repay a portion of their debts, however with a relatively lower capacity to repay (in full)
• This line of thought is supported by the materially higher personal insolvency uptake rates seen in the UK relative to Australia
• For example, in H1-2023, UK personal insolvency volumes were 11x larger than Australia’s despite the UK population only being 3x larger than Australia’s
• The UK mechanisms pictured above can be defined as below:

Mechanism	Description
Debt Management Plan (DMP)	An informal insolvency solution without debt relief. Arrangements are negotiated with creditors and managed by a third-party, but only interest relief is offered.
Individual Voluntary Arrangement (IVO)	Aligns relatively closely with Australia’s Debt Agreement, without a term cap.
Debt Relief Order (DRO)	Allows those with moderate levels of debt and near-no capacity to repay an alternative to bankruptcy with complete debt relief.
Bankruptcy Order (BO)	Aligns with Australia’s Bankruptcy mechanism, but with a default discharge period of one year.