This is the third article in my rant over the bad – in fact downright dangerous – advice my fellow insolvency practitioners are regularly giving out…
The first was about the bad advice being given to company owners, selling them a liquidation they didn’t want, need nor could easily pay for…
The second was about the failure to advise individuals that income based individual voluntary arrangements are a massive gamble…
This, my third, rant is again about the bad advice given to individuals, but on a more general level.
Let me explain…
Have you seen how debt advisers of all sorts, but particularly the IVA specialists, send husbands and wives, or couples, down the same debt solution at exactly the same time? They argue that it makes perfect sense, that doing so is cost effective… yet that, at least for me, is manure, and I’m going to show you why…
First of all, a few key principles for you to take on board…
You, me, your kids, your parents, Uncle Tom Cobleigh and all are separate individuals in the eyes of the law. We’re each our own entirely distinct legal entity. It matters not that we are married, part of a family, related in any way – we are all our own separate legal being, with our own little package of assets and liabilities, and thus our own individual options for dealing with our financial problems.
And, importantly, those options are often not mutually exclusive. An option taken now doesn’t always stop another being taken later on.
Sure, there are a few complications when their are joint assets or joint debts, but the principle remains – we each have our own separate options, which we can take as and when we choose.
Let’s take a typical situation…. Husband (Basil) and wife (Sybil); Basil is a landscape gardener who chooses to run his little business through a limited company, in which he owns all the shares. His normal work is maintaining your and my garden, doing a little building work from time to time, pathways, rockeries, decking, BBQs, that sort of thing. A nice little business, but not enough to keep house and home, the family has to rely on his wife’s income too, especially as he had an accident a year or so ago – he twisted his back beating up his Morris 1100 and couldn’t work for 6 months. Couple this with a foray into the buy to let market where a void period and some unexpected repairs as a result of the actions of a dodgy tenant and supporting one of his kids through university saw his debts built up. He now has £50,000 in personal credit card and loan bills, each at their max, he’s now not even paying the minimum payments – the business isn’t doing as well as he’d hope as people aren’t spending like they used to on their gardens, and his bad back plays up from time to time, middle age is taking its toll. There’s nothing but a few items of small plant and an inexpensive van in the company: it”ll generate £1,500 per month on a good month, more often than not a lot less, particularly in the winter months. The buy to let is in negative equity – they’d taken out the maximum mortgage they could when they bought it, and have remortgaged a few times, using the money raised to buy Basil’s van and tools. The buy to let is making a profit of £120 per month, after paying the mortgage, assuming everything goes hunky dory….
Feisty Sybil is a part time shop assistant and home maker. When the debts started piling up she took on a few debts too – but at a far lower level, after all, she earns a lot less than Basil. She’s got £20,000 of credit card debt, of which £15,000 is in her own name, £5,000 is a joint debt with Basil.
The family, Basil, Sybil and their three kids – Martha, 20, going through Wolverhampton Uni; Steve 16 and at Bilston Academy; and Sarah, 13 at Coseley School – all live in a cramped three bed semi on the Coseley/Bilston border. A few years back, with the walls moving in, Basil, a dab hand at building, started on an extension above the garage. But then he hurt his back, he couldn’t work and now he hasn’t got the money to finish it and doesn’t know when he will ever have. The house is virtually unsaleable in its present condition, at best a buyer would pay a knock down price, leaving nothing in the kitty to set up home elsewhere after settling the mortgage. Basil is hoping Sybil’s mother, Ethel, will leave them something in her will, but they’d be lucky to get £45,000 when she turns her toes up. And that’s assuming it doesn’t all go in care home fees. He/they have been holding on for that legacy – it might just provide the lifeline they so desperately need – but cantakerous old Ethel, whos’ yoyo’ed in and out of hospital over the last 18 months, seems to have 9 lives.
So you’ve got the picture – The Fawltys are a hard working, average, working class family who are trying to work their way through life, but have been hurt by a few things that all came together to put them into quite a difficult position.
So they go to see an insolvency practitioner.
This ‘expert’ recommends an IVA – a ‘joint IVA’ – the great thing is they’ll be able to substitute the need to pay the minimum payments on their debts with ‘one affordable payment’ of just £400 per month into the IVA – it will mean paying less and bring some certainty to the situation, they’ll be able to slep at night. They’ll even keep their home; Basil will still be able to act as a director of his little limited company; they could keep the buy to let; and in 5 years time, they’ll be debt free – what they’ve not paid to their £65k of unsecured debt will simply be written off. What’s more, them both going into an IVA right now would not only keep the IVA experts’ costs down, it would make things far simpler for them as they’d both come out of it at the same time, ten years before retirement.
Sounds reasonable? Sure it does… but as I said, it’s appalling advice.
Let me tell you what taking that advice would lead to…Ethel’s legacy going into the IVA to pay the insolvency practitioner’s fees and Basil and Sybil’s creditors – that’s to say, the Fawlty family would see nothing of it; Basil and Sybil still having to pay £400 per month into the IVA for 5 years – these monies also going to the creditors to pay off the ‘capital sum’ and interest (with interest being charged at 20% to 30% pa); the IP getting about £20k in fees in total; etc… there are other implications too. All in all a poor deal for the family.
So let’s pull the advice to bits…
The following is a key principle – please remember it… ‘Just because one solution might be the best option right now for one person, doesn’t mean to say the other has to follow the same course at this exact point in time, even if ultimately it might be the best option for them too.’
Here’s another – both Basil and Sybil have their own full tool box of options each – these include (i) Best manage their cash, keeping themselves out of any formal insolvency; (ii) Keeping creditors at bay using the ‘token/no payment’ option; (iii) Debt Management Plan; (iv) IVA; and (v) Bankruptcy.
It’s vital they should assess their own individual options first, asking themselves ‘What’s the best for me at this particular point in time?’. Then when they know what that option is, assess what that means for the other member of the couple.
So the steps are:
1) What’s the best option for me? Write down the pros and the cons for me.
2) If I take that option, what impact does that have on my partner? Write down the pros and the cons for them.
3) Are we prepared to live with the cons? Could those cons be reduced, if not eliminated, by something either I or my partner could do? If I’m not happy with the cons, and neither I nor my partner could reduce them, what’s my second best option and what are its pros and cons – the cons on both me and my partner?
4) Repeat steps 1) to 3) for your partner, assessing the pros and cons on both them and you.
5) Put together a plan that you’re both ‘happy’ with. Ask yourself, whether overall, this plan works and fits with what you both want to achieve.
6) Run with it…
Here’s what I would have advised in Basil and Sybil’s case…as you’ll see it’s a country mile away from what the other IP advised…
Basil should go into bankruptcy soon, and first – cost of doing so £700, debts written off £50,000 – it would be like picking a 70 to 1 certain winner at Epsom, a great return on his money; he’d come out of bankruptcy in 12 months time. Sybil should keep her creditors at bay for that 12 months, using the token payment option; before Basil goes bankrupt, Sybil should become the shareholder and director of the company, taking responsibility for running it, with Basil becoming a mere paid employee – for just 12 months. Then when he’s out of bankruptcty the roles would reverse – she’d go bankrupt, but before she did so, he’d take buy back her shares in the company and get appointed as its director. Cost to her, £700, debts written off £20,000. Get Ethel to change her will, so the beneficiaries are Martha, Steve and Sarah, missing out the Basil/Sybil generation (she could always change it back in 24 months time if she’s still around!) – that way the legacy would not fall into the bankruptcy as ‘after acquired property’, it could be used to pay down the mortgage on their home or the BTL giving them a far better chance of a prosperous retirement.
An alternative to think about in 12 months time would be, if Ethel dies in the meantime and leaves her £45k to the kids, for some of that to be used, say 40%, £8k, to offer to her creditors in full and final settlement, if she really wanted to avoid bankruptcy. The point is, she doesn’t necessarily have to follow Basil’s route – having ringfenced the legacy, she could take another solution then. Watch, wait and see!
Result if plan A, of them both going bankrupt, him first, her later: No disruption to the business; total process 24 months when one or the other was in bankruptcy compared to 5+ years in an IVA; no assets lost – not even the home or BTL (unless they actually wanted to lose the BTL – they have the choice); legacy kept within the family, doing it, rather than the creditors some good; no IP fees, whole process cost £1,400 (plus the cost of my advice), a little inconvenience and form filling, and the cost of writing one/two wills, compared to an IVA which would see over £69,000 spent, I’d argue wasted.
The Fawltys’ name may be made up but the facts are real,but in recent weeks I’ve seen 2 families, both where they’d been led down the garden path by so called experts with plausible yet downright dangerous advice, costing them money they couldn’t really afford. You see, they suffered the outcome I ‘anticipated’ above, they will probably now never manage to rebuild their lives.
And that is inexcusable. The IPs took them to the cleaners, their entire family, not just the ones in debt, but them all.
You see nothing will ever be a substitute for experience, professionalism and a single minded focus on getting the best outcome for the client … and with almost 30 years in the insolvency game, you can be sure anyone who comes to me for support will be getting these in abundance. They will not be sailing into unchartered territory, they’ll get advice and support that will stand the test of time.
If you’re accustomed to using another insolvency practitioner and the story I’ve painted above is ringing true for you, I’ve a question for you…why?