Insolvency figures only scratching the surface
Figures just released from the Insolvency Service reveal that 35,682 consumers were declared insolvent in the first three months of 2010 - this is an increase of 17.9% on the same period last year.
Insolvency involves an individual either going or being made bankrupt or successfully proposing an individual voluntary arrangement (IVA). The latter is seen as a less stringent form of insolvency. It allows a borrower to enter into a repayment programme, usually for five years, and interest and charges are frozen with the remaining debt written off upon completion of the arrangement.
Also included in the figures are the number of debt relief orders taken out. These were introduced by the government in April 2009. A debt relief order is a fast track online form of bankruptcy for consumers with debts below £15,000 and minimal assets.
Only a selected few individuals are able to propose a debt relief order because of the ridiculous and unreasonable qualifying procedure - in my view, they are totally ineffective in helping many consumers. However, they work for some as 17,475 have been issued since their inception.
Although these insolvency statistics are worrying, I wonder whether the numbers should not be higher still. Are these figures masking the true amount of unmanageable debt as record numbers of consumers battle through an over-indulgence of consumer debt coupled with high unemployment?
Supporting my theory is a recent report by R3, which revealed that around 700,000 ‘hidden debtors’ are in long-term debt management plans, some of whom have no hope of ever paying their debts back in their lifetime and technically are insolvent. These consumers are instead, languishing in long-term informal repayment programmes with no debt, or for many, no interest relief.
I believe we are just scratching the surface as too many people have debts they have no realistic hope of repaying. Some try to offer an IVA to their creditors only for it to be rejected by a lender. There is also the issue of the cost for a person to go bankrupt, which has climbed a massive 25% from 6 April this year to £600 per person. Can this huge increase in fees payable by the person about to go bankrupt be justified and is it fair?
I am concerned that some borrowers will not be able to cope psychologically as the pressure builds from bills in the post to harassing telephone calls from lenders demanding to be paid. These consumers often need to go bankrupt but cannot afford to pay the fee. They are no longer paying their lenders and the debt, pressure and stress is building day-by-day.
Even in a bankruptcy, the individual is still expected to make payments to their creditors if they are deemed able to afford it. This I agree with and the payment term is for a period of three years when filing for bankruptcy and five years for an IVA.
Another recent report highlighted the top two reasons that deterred consumers from going bankrupt, even though they have no other option available. The first was having to attend court to file for bankruptcy and the second to have one’s name and address inserted in the local paper for all the gossipmongers to feed on.
On 6 April last year the Insolvency Service removed the mandatory requirement to advertise someone’s bankruptcy in the local paper. This massive change in bankruptcy policy, which regrettably has received little media attention, could impact on future insolvency figures because there is no longer the need to fear having one’s name and address inserted in the local paper.
Another aspect is the option of no longer having to attend court to file for bankruptcy, which is currently under review with the Insolvency Service.
Although insolvency is a way of dealing with debts that cannot be repaid one has to remember that someone who has been bankrupt, even after discharge, has no credit facilities, no overdrafts, no credit card and no credit file. We are fast moving towards a cashless society so who gives a thought about those who have had financial difficulties and how they are meant to cope after going insolvent?
These people need support and help to manage and rebuild their lives.
Creditors in particular need to wake up and listen and support borrowers that are prime candidates for bankruptcy, as it is often their lack of support that eventually forces borrower into insolvency.
The total number of insolvencies for 2009 was 134,142, which was a massive increase of 26% on the 2008 figures. My forecast for 2010 is for insolvencies to peak at around 165,000, which dwarfs the numbers for the preceding year.
Remember, the last debtors’ prison shut in 1869, some 141 years ago. It is not a crime to be in debt, and something I insist on is that those who are should be treated with respect.
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.
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.
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.