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DEBT LEVELS COULD BE ‘TIP OF THE ICEBERG’, WARNS THE DEBT ADVISOR

Published on:August 6, 2010Author:The Debt Advisor

Figures published today by the Insolvency Service show the number of personal insolvencies in England and Wales reaching 34,743 in the second quarter of 2010 – a decrease of 2.6% on the previous quarter but an increase of 5.0% on the corresponding quarter a year ago. The figures consisted of 13,466 Individual Voluntary Arrangements (IVAs), an increase of 10.2% on the corresponding quarter in 2009, 14,982 bankruptcies, representing a decrease of 20.6% on the corresponding quarter of 2009 and 6,295 Debt Relief Orders (DROs).

Bev Budsworth, managing director of multi award-winning, The Debt Advisor, commented: “Personal insolvencies reached 34,743 which is a 2.6% decrease on the first quarter this year but still up on the same period last year. The level of UK personal debt is just short of £1.46 trillion with the average adult owing just under £30K, inclusive of mortgage, or 127% of their average earnings.  It’s clear then that this is still a huge issue, despite the slight reduction.

“The Coalition’s cuts are really beginning to bite and we are starting to see the effects on ordinary people. These people are at risk of losing their jobs and soon will not be able to cover their outgoings, never mind any debt commitments. The source of job losses is a double whammy. The public sector will have no choice but to make wide scale redundancies as their budgets are cut centrally. Also, the private sector continues to face losses as companies face more projects and grants postponed or even mothballed by the new Government.

“My worry is we are seeing just the tip of the iceberg and a raft of deeper cuts, not seen since the 1970s, will plunge more and more people into debt – especially those on low incomes. What these people need is real help, right now!

“Not only does indebtedness have a crippling effect on individuals, it also has serious implications on the country’s finances. Therefore, it’s essential that we ‘recycle’ these people, getting them back on track and making a positive contribution to the economy by paying off their debts.

“We need a common sense approach to this issue, what we don’t need is endless Government strategy ‘re-thinks’ that are in danger of undoing what has taken government working parties, the Insolvency Practitioners Association (IPA), the IVA Standing Committee, the Ministry of Justice (MoJ) and the Office of Fair Trading (OFT), nearly seven years to achieve.

“We have an excellent rescue culture in the UK but we need to make sure it remains fit for purpose. We need joined up thinking and we need it now! Continually stalling the process whilst the new Government takes stock will not help anyone, not least the thousands of people who need help to get their finances sorted and repay as much debt as they can afford, whilst being protected from creditors.

“An IVA is a great scheme, recent changes allow for six months payment breaks for those who have recently been made redundant, keeping the IVA on track and avoiding bankruptcy.

“However, more can and should be done, particularly by creditors who buy debt at a discount. Banks and credit card companies frequently sell their debt, rather than waiting five years for 40% to 50% of their debt to be repaid. Some ‘debt buyers’ do not support the rescue culture and instead insist on policies that keeps people trapped in the cycle of debt.  These creditors need to realise that debtors can vote with their feet and, at any time, declare themselves bankrupt to a court with no payback to the creditors.

“Support for IVAs is essential, not least for the fact that the average return for an IVA is around 42% of the debt – over 80% of all bankruptcies returns nothing to creditors. For every ‘statistic’ there is a real person on an IVA or debt management plan that is determined to pay back what they can. These plans are not a ‘cop out’, they are a structured way to get that individual back on their financial feet.”

The number of company liquidations reached 4,080 in the second quarter of 2010 – a slight increase of 0.5% on the previous quarter and a decrease of 19.1% on the same period a year ago. The figures consisted of 1,169 compulsory liquidations, a decrease of 9.9% on the previous quarter and a decrease of 21% on the corresponding quarter in 2009 and 2,911 creditor’s voluntary liquidations (CVL), representing an increase of 5.4% on the previous quarter but a decrease of 18.3% on the corresponding quarter of 2009.

Bev explained: “I think the decline in the number of administrations is to be expected as slowly more business utilise the Company Voluntary Arrangement (CVA) procedure.

“We have personally seen an increase in CVAs as it is now far more difficult for individuals to raise enough money to buy back a business out of administration. Recent tightening up on best practice by our trade association, R3, has helped minimise abuse of the pre-pack procedure. Now, if the existing owner wishes to enter into a pre-packed sale from the administrator, they are forced to offer a competitive price as the business must be properly marketed to a wider audience, prior to the sale.

“However, I still believe that for such a useful tool, CVAs are relatively underused and are abandoned in favour of liquidation or administration. The cost of administration can be severe for both directors and creditors. A CVA can protect the business, allowing it to retain its assets and provide debt forgiveness. It can also save the directors thousands of pounds as personal guarantees are not made and, most importantly, creditors can get some of their money back.

“Liquidations are fairly static, as expected. This is because businesses which aren’t strong enough to survive the economic downturn continue to have no choice but to throw in the towel.

“The next 18 months will be key for any SME. The businesses that will survive are those with their fingers on the pulse and those that run a tight ship. Those companies that know what drives their business and who regularly monitor them, will be well paced to weather the economic storm.”