Insolvencies hit record high
Personal insolvencies hit a record high today, according to official figures from the Insolvency Service.
The service reported a staggering 33,073 individual insolvencies in England and Wales for the second quarter of 2009 - up from 29,774 in the previous quarter, and an increase of 27.4% on the same period last year.
This was made up of 18,870 bankruptcies; 12,225 individual voluntary arrangements (IVAs) and 1,978 debt relief orders (DROs).
Mike Gerrard, a personal insolvency partner at Grant Thornton, says: "The level of unemployment undoubtedly has an effect on the insolvency statistics but we haven't seen the full impact yet. The inability to re-mortgage is now a big issue and one that will last after the recession is over.
"It's clear that the level of personal insolvencies will continue to rise even when the economy begins to pick up and there is going to be a definite recession hangover effect that will last for some time.
"The rise in negative equity and lenders employing stricter lending criteria has hit people who would previously have been able to borrow their way out of immediate trouble."
The figures follow the latest statistics from Credit Action that put the average personal debt, including mortgages, owed by UK adults at £30,460 - equivalent to 133% of average earnings.
Average consumer borrowing through credit cards, car finance deals, store cards, overdrafts and unsecured personal loans has risen to £4,825.
If you’re feeling the pressure from creditors and struggling to meet repayments on your debts, don’t suffer in silence. Seek help from a debt charity and look into the three main debt solutions:
Debt relief order
The DRO is a new individual insolvency procedure which came into force on 6 April 2009 to provide an alternative route into personal insolvency for certain categories of people. It is suitable for people who do not own their own home, have little surplus income and assets and less than £15,000 of debt.
You can apply for a DRO through an intermediary at a debt charity or advice service, and if accepted the order lasts for 12 months. During this time creditors named on the order cannot take any action to recover their money without permission from the court. At the end of the period, if your circumstances have not changed, you will be freed from the debts that were included in your order. It costs £90 to apply and does not involve the courts.
Like IVAs and bankruptcy (see below), DROs remain on your credit history for up to six years and will impact on your ability to gain credit in the future.
Individual Voluntary Arrangement
An IVA is basically a contract between you and your creditors. With the assistance of an insolvency practicioner, you will put forward a proposal to your creditors, outlining your current financial position, with an offer of the most you can afford to pay.
Contributions are normally paid monthly and typically last between three to five years. You can also make a one-off lump sum payment. On completion of your part of the contract, the creditors have no recourse over the debt and it is deemed to be legally discharged.
More flexible than bankruptcy, IVAs give you more control over your assets and payments to creditors. However, there is no guarantee that the creditors will agree to your proposal and failure to comply with the terms of the IVA may result in eventual bankruptcy.
Fees tend to vary between £1,250 - £4,000 plus vat and will be based upon the number of creditors and the complexity of the case.
You or your creditors can apply for a court order to be declared bankrupt if you have unmanageable debt. It costs a minimum £510 - more if solicitors are involved - and entails declaring every detail of your finances and an immediate freeze on your accounts and credit cards.
You will be required to give up any assets, including interest in your home, and will likely involve the closure of any business you run. The bankruptcy order will be made public and your assets will be distributed among your creditors.
You will be automatically discharged from bankruptcy after a maximum of 12 months providing you carry out the duties required under the order. While bankruptcy frees you from overwhelming debts, it is subject to a number of obligations and restrictions.
Bankruptcy is the most restrictive route to personal insolvency and should only be considered with professional advice when other options have been ruled out.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
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.
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.
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.
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.