The rise of the invisible debtor
Over the past decade, this country’s economy has been fuelled by consumer borrowing. We have been encouraged to spend and pay later through slick marketing campaigns and the easy availability of credit; from this we have developed a ‘must have now’ culture and millions of consumers have become burdened with unmanageable debt.
We are now paying for this. Figures released by the Insolvency Service show that the number of people being declared insolvent in England and Wales hit 134,142 in 2009 - an increase of 26% or 27,598 individuals compared to 2008.
This is the highest number of insolvencies since records began back in 1960.
However, the Association of Business Recovery Professionals, or R3, believes there could be as many as 700,000 ‘hidden debtors’ – basically, people who are in long-term debt management plans but have no hope of repaying their debts during their lifetime and are, therefore, technically insolvent.
I think this is just the tip of the iceberg – too many people have debts that they have no realistic hope of repaying. Some try to take out an IVA but are turned down. Others would like to go bankrupt but can’t afford to, as it currently costs £510 (or £360 if you are on certain benefits).
I have many clients who are no longer paying their debts, but don’t know where to turn to – their debt, and stress levels, are increasing every day.
When all other options of repayment have been considered and exhausted, then bankruptcy, as a final solution, will sort out the debts once and for all.
Unfortunately, some debt management firms tend to steer clients away from this option because it will not normally earn them a fee.
Consumers themselves might also be against going bankrupt, firstly, because they fear having to attend court to file for bankruptcy and secondly because they don’t want their name and address to appear in the local paper for all the gossipmongers to feed on.
However, what many people don’t know is that on 6 April 2009 the Insolvency Service removed the mandatory requirement to advertise someone’s bankruptcy in the local paper.
Meanwhile, the Insolvency Service is also considering removing the requirement for the bankrupt to attend court - instead this will be done online. This is, however, unlikely to be introduced this year and is still under review.
Some will argue that we shouldn’t make it too easy for people to go bankrupt.
But I disagree. I see the pain and suffering of people who have lost the ability to repay their debts.
They are plagued by debt collectors and harassed to pay money they simply do not have; many become depressed and often turn to alcohol, crime or gambling.
Going bankrupt is not an easy option; even after discharge, a person will have no credit facilities, no overdrafts, no credit card and no credit file. However, for many people it is the only answer to breaking out of their debt spiral.
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.