Bankruptcies on the rise
The number of people going bankrupt jumped by over 12% over the summer, while the number of companies going bust has leapt by 26% over the past year, according to new figures from the Insolvency Service.
Between June and September, there were 27,087 individual insolvencies, up 8.8% from the spring. Of this figure, 17,341 were bankruptcies and 9,746 were individual voluntary arrangements (IVAs). During the same period, over 4,000 businesses went into liquidation.
Vicky Redwood, UK economist at Capital Economics, blames the rise in energy bills as the key factor behind the rise in both company and personal insolvencies.
“With the full effects of the credit crunch and rising unemployment yet to be felt, bankruptcies are set to soar over the coming two or three years,” she adds.
Capital Economics is forecasting the number of personal insolvencies to rise from around 110,000 this year to around 140,000 in 2009 and even further thereafter.
“After all, the biggest rises in insolvencies might only start to occur once unemployment has risen further,” Redwood explains. “Given that we do not expect unemployment to peak until the end of 2010 - at over three million or 10% - insolvencies are unlikely to peak until 2011 at the earliest.”
Bev Budsworth, managing director of The Debt Advisor, also expects things to get worse. “I don’t believe that we have seen the full effects of the credit crunch, even as we enter a recession,” she says. “Higher living costs and tighter credit will increase the demand for more formal debt management schemes.
“The government needs to increase the pressure on banks and financial institutions to pass on the benefits of the multi-billion pound rescue scheme down the line to consumers and small businesses. The banks need to play their part.”
Other commentators are concerned that too many people might be resorting to bankruptcy, IVAs or debt management before properly exploring their options.
Louise Bond, personal finance manager at uSwitch.com, says: “It’s worrying that so many people are resorting to individual insolvencies to resolve their personal debt problems. These measures should always be the last resort for anyone with financial problems as they have a very serious impact on people’s credit histories and their ability to borrow in the future. In the case of bankruptcy, it could also impact employment prospects.”
Are you struggling?
Catherine Matthews, partner at licensed insolvency practitioners, Tomlinsons, says: “[I] urge people to take action as soon as possible if they are starting to struggle. The worst thing to do is stick your head in the sand and hope it will go away.”
According to Tomlinsons, the five signs that you are starting to struggle financially are:
1. Falling behind with your mortgage
2. Increasingly having to live off your credit card just to make ends meet
3. Having to borrow from parties that you wouldn't normally take credit from
4. Borrowing money from family or friends to pay pressing creditors
5. Borrowing from Peter to pay Paul
If you are experiencing any of the above problems, you should consider getting in contact with a debt charity to see how they could help.
Bond says: “Banks have a duty to help people in financial hardship and free debt advice is readily available from organisations such as the Consumer Credit Counselling Service, National Debtline and Citizen’s Advice.
"I would strongly urge people to start taking action before they reach financial breaking point.”
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.