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“DON’T GO BACK TO OUR OLD WAYS” AS INSOLVENCY REACHES RECORD HIGH

Published on:February 8, 2010Author:The Debt Advisor

Figures published today by the Insolvency Service show a record high with the number of personal insolvencies reached 35,574 in the fourth quarter of 2009 – an increase of  24.9% on the same period in 2008. The figures consisted of 13,219 Individual Voluntary Arrangements (IVAs), an increase of 26.3% on the corresponding quarter in 2008, 17,007 bankruptcies, representing a decrease of 5.5% on the corresponding quarter of 2008 and 5,438 Debt Relief Orders (DROs).

Bev Budsworth, managing director of multi award-winning, The Debt Advisor, commented: “Personal insolvencies reached nearly 134,000 in 2009 and is still around 27,000 more insolvent people than in 2008 and another record high! The level of UK personal debt is just short of £1.5 trillion with the average adult owing just over £30K, inclusive of mortgage, or approximately 133% of their average earnings.  It’s clear then that this is still a huge issue.

“The demand for credit is clearly back on the increase. During the recession, the trend for many was to pay of their debts rather than spending their cash, a pattern that was emphasised due to low interest rates making saving less rewarding. However, figures released this week by the Bank of England show that new, unsecured borrowing has surpassed the level of debt repayments for the first time in six months.

“We need people to spend and support their local high street so that we can get the economy back on its feet.  However, it is still too easy to put your purchases on plastic and only pay back the minimum payment – ultimately only benefitting the lenders. We mustn’t go back to our old ways that got us into this mess in the first place!”

Bev’s comments come at a time when the Council of Mortgage Lenders are estimating that 132 properties a day were repossessed throughout 2009 and approximately 1,400 people becoming unemployed on a daily basis. Bev continued: “Although the UK is now officially out of recession, a growth level of 0.1% is disappointing and is indicative of a depressed economy. Unemployment and arrears are inextricably linked and could get far worse if inflation and interest rates rise.

“The problem is compounded as if and when the unemployed find work, a recent CIPD report has shown that their new wages are typically 28% less. The most likely reason for mortgage arrears is a loss of job and subsequent decline in income.  The government’s initiatives to help stem repossessions does seem to be having a positive effect as the Council of Mortgage Lenders has reduced the projections for repossessions in 2009 from 79,000 to 48,000.  We need to support recent FSA proposals to treat mortgage borrowers fairly and keep repossession as an absolute final resort.

“The Department for Business, Innovation and Skills (BIS) are proposing that the debtors need to attend court to file for bankruptcy is removed and it is replaced with a simpler, online application. I think this is an extremely dangerous policy and I would always advise that the debtor obtain specialist advice on their options via a face-to-face meeting, rather than try to form an informed decision online. Proper counselling of individuals is essential. Individuals will therefore be properly signposted to authorised advisers helping to reduce the number of unscrupulous advisers charging individuals to declare themselves bankrupt.”

Bev concluded: “These record-high statistics latest statistics may also not paint the full picture as they do not include debt management cases which can provide more of a ‘soft landing’ for individuals who need short-term help to get back on their financial feet.

“The good news is that the figures do indicate that more and more people are gaining access to specialist advice to manage their debts. However, we must do more to help. My work with the Personal Insolvency Committee (PIC) and the Ministry of Justice (MoJ) is seeking to ensure that the industry is properly regulated but at the same time, transparent and easily accessible. Only by supporting debtors with specialist advice about their options, can we expect them to make an informed decision and avoid unscrupulous advisers charging them thousands to declare themselves bankrupt.

“Launched last year, the number of DROs continues to increase which I think is to be expected as consumers increase their understanding and awareness of this option. I wouldn’t be surprised if levels rose to about 16,000 by the end of 2010.”

The number of company liquidations reached 4,566 in the last quarter of 2009 – a decrease of 1.7% on the previous quarter and a decrease of 1.1% on the same period a year ago. The figures consisted of 1,338 compulsory liquidations, an increase of 2.7% on the previous quarter but a decrease of 14.2% on the corresponding quarter in 2008 and 3,228 creditor’s voluntary liquidations (CVL), representing a decrease of 3.5% on the previous quarter but up 5.7% on the corresponding quarter of the previous year.

“It’s encouraging to see company liquidations on the decrease, however we are continuing to see corporate cases getting into difficulty as sales have declined.  Despite substantial efforts by the government to support the banks, banks have not returned to normal lending which the Federation of Small Businesses says is absolutely essential to help the five million small businesses in the UK which account for over 50% of our GDP.

R3, the trade body representing Insolvency Practitioners predicts that our exit from recession will be long and protracted.  The reason for the post recession ‘spike’ is that creditors will take tougher action as growth resumes. The recovery will also pile pressure on bank lending officers to switch cash from depressed businesses to start ups and lightly geared companies with better prospects.

The attitude from the government will be critical to the extent of the fall out. The Revenue and Customs are the biggest source of winding-up petitions. The Revenue has been much more lenient during the recession issuing a third fewer petitions and operating the ‘Time to Pay’ scheme.  However, for those businesses that fail to keep to these arrangements, they can expect tough treatment. Many of these businesses will fail as they are too badly damaged and have lost their way.

These businesses have clearly taken their eye off the ball for one reason or another and that’s why I always explain to clients that they need to eat, drink and sleep their business plans and ensure that it is built on a sound financial platform. Whilst I support the Federation of Small Businesses’ (FSB) call that we are not doing enough to help small businesses, I firmly believe that sound business ventures will get the funding they deserve.”

“The current banking situation of less competition is also not helping businesses. I support the FSB’s message that there needs to be more competition within the banking sector and that banks must return to normal lending criteria to save our lifeblood of small businesses in the UK.