Do you owe more money than you're worth?
With so many battling debt and unemployment, the number of people owing more than they're worth (insolvent) has, according to The Insolvency Service hit record levels - 135,089 for 2010.
My view however is that this figure still does not reflect the real level of over indebtedness in the UK and anyone reading through the figures thinking that consumers have their debts relatively under control is looking through rose-tinted glasses.
What the figures don't tell you
This is because The Insolvency Service's figures excludes the 'debt iceberg'. R3, a leading professional association for insolvency specialists, claims this iceberg contains up to 500,000 people in unrecorded debt management programs. Then we have another 574,000 that are struggling financially but who have only contacted their creditors informally, not using a debt charity or the commercial sector.
Of even more concern are the 961,000 individuals struggling with debts but who have not sought help. This group alone could find themselves in formal insolvency procedures unless they take swift action.
What drives me insane is that the tools that are there to help people resolve and control their debt issues, such as Bankruptcy, Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs) are just not accessible enough.
Many cannot afford the bankruptcy fee and fear their names appearing in the papers
I know of many individuals that cannot go bankrupt because of the huge £600 fee. They are no longer paying their lenders and are moving house every six months just to keep ahead of debt collectors or bailiffs. One can only imagine the pressure and stress these people are under.
Reasons for keeping quiet
A recent report highlighted the top two reasons putting consumers off bankruptcy, even though they have no alternative. The first was attending court to file for bankruptcy and the second having one's name and address in the local paper for all the gossipmongers to feed on.
The Insolvency Service is currently conducting a review as to whether bankrupts actually need to attend court to petition and I can hear some of you say this should still be a necessity. I say society needs to be more supportive for those that find themselves with unmanageable debt and I point out that the last debtors' prison shut in 1869.
There are sufficient provisions in place to punish those bankrupts that have been negligent in their borrowing or conduct, and yes, if you commit fraud then yes, you go to jail.
The requirement to advertise a bankrupt's name and address in the local paper was removed last year and is only necessary if the person concerned is uncooperative or if the Official Receiver deems it necessary. So why are consumers not made more aware of this change?
Individual Voluntary Arrangements (IVAs) fast becoming a more attractive option for consumers
IVAs have advanced over the past year or so, now being supported by most of the High Street banks and credit card providers, probably because they know the alternative would be bankruptcy, and also because there are no upfront cost for fees for the person proposing the IVA; these are taken from the monthly contributions over five years. This is reflected in the overall insolvency figures for 2010 with bankruptcy numbers down 20% and IVAs up 7%.
Impact of DROS on the 'bankruptcy' figures
Included in the insolvency figures are Debt Relief Orders, (DROs), which were introduced by the Government in April 2009. A DRO is designed to allow those with debts of less than £15,000 and minimal assets to write off their debts without entering into a full blown bankruptcy or having to go to Court. These however are proving to only help a selected few and are totally ineffective in helping consumers because of the ridiculous and unreasonable qualifying procedure; still they work for some as over 25,000 were issued in 2010 alone.
Personally, I would like to see the qualifying criteria changed in order to appeal to many other desperate and vulnerable consumers that would otherwise be rejected.
My recommendations would be to:
- increase the assets amount from £300 to £3,000
- include homeowners that are in negative equity, currently exempt if a home owner
- double the car value amount from £1,000 to £2,000
- increase the disposable income level from £50 to £100
- raise the threshold from £15,000 of unsecured debt to £25,000
Disincentive to work for those on DROs
Another criticism of the DRO is that once it is granted there is a natural disincentive l to find employment. Under the eligibility rules for DROs the person must disclose if their circumstances and/ or income change over the 12 month period the order is in force.
If for example the individual were to find employment on month 11 of the DRO then this extra income may well mean that he/she is no longer eligible and the DRO may be revoked. You have to say that a DRO is mainly for those on benefits or unemployed and whilst the concept is good it just needs thinking through more clearly and be better applied.
However, if the areas I mention above are addressed they will surely add to the insolvency figures - so I shan't hold my breath for too long.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.