Personal insolvencies predicted to hit 10,000 a month in 2008
An estimated 10,000 people will declare themselves insolvent every month this year with at least of third of those between now and March hastened by excessive Christmas spending.
That's the warning from personal insolvency practice Grant Thornton which predicts a total of 120,000 people will become insolvent in 2008. Alarmingly, a third of the 28,000 insolvencies forecast for the first three months of the year will be brought on by overspending at Christmas.
In 2006, a record 100,000 individual declared themselves insolvent and in 2007 this increased to an estimated 110,000.
Mike Gerrard, head of Grant Thornton's personal insolvency practice, says: "Sadly, many individuals spend on credit at Christmas and pay no heed to the financial warning bells. Come January, they find themselves in a situation where previous financial woes are compounded by the bills arriving from the festive season and in these situations insolvency becomes the only way out."
The housing market slowdown and tightening of mortgage lending are also expected to exuberate the situation. Despite the Bank of England cutting interest rates in December, the payment shock facing around 1.4 million mortgage borrowers coming off low, fixed rates in 2008 is expected to be one factor in the continuing increase in personal insolvencies.
In addition the increase in the cost of living could be another factor taking its toll on individuals whose finances are already stretched to their limit.
Gerrard says: "In only 12 months the cost of filling up a vehicle with unleaded petrol has increased by 16% which means Joe Public is now having to find an additional £155 this year to fill up the car.
“Coupled with rapidly increasing gas and electricity prices and it's easy to see how those already struggling to pay off credit, particularly those servicing mortgages, are caving in to the pressure."
Britons are currently paying a staggering £93 billion in interest on loans, credit cards, overdrafts and mortgages with total personal debt totalling £1.39 trillion, according to Credit Action.
And a survey by uSwitch.com found that 9.5 million people have maxed out on one form of credit in the last six months.
Mike Naylor, personal finance expert at uSwitch.com, says consumers who consolidate all their debts could save £15 billion in interest. For the average household this is a saving of £605 over three years.
Naylor adds: “People have enjoyed easy access to cheap credit for quite some time, but for some, the party really could be over. Anyone with multiple debts and a poor credit history could be vulnerable to the impact of the credit crunch and should seriously consider consolidation while the option is still available.”
Terry Balfour, director of IVA comparison website IVA.com, also predicts a rise in insolvencies as debt consolidation lenders get tougher on criteria in light of the credit crunch.
Balfour says that borrowers who have been turned down for a consolidation loan may have to either declare themselves bankrupt or, if they have around £180 disposable income a month, consider an IVA.
He adds: “Paying interest to several lenders on credit cards, store cards and loans is incredibly expensive so consolidating the debt into one loan is a good move – but the lending and spending boom is coming to an end and this is no longer the easy option.”
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.
This entails taking out a loan to pay off others, often to secure a lower interest rate – a fixed interest rate or for the convenience of servicing only one loan. The problem is that many unsecured loans – personal loans, overdrafts, credit cards – are then made into one big secured loan and use any property you have as collateral. Fail to pay the loan and the lender can seize your home, so it’s not for those with unstable incomes. Also, don’t be fooled that your new monthly payment is a lot less than you were paying for all your old debts: you’ll be paying off your new loan over a much longer period which, in the long run, could cost you more. Consolidation also won’t address any underlying problems you have with your finances, so reducing or combining your debt repayments may only delay more serious problems, rather than solve them.