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STILL SUFFERING THE ‘DEBT HANGOVER’

Published on:September 20, 2009Author:The Debt Advisor

Figures published today by the Insolvency Service show the number of personal insolvencies reached 35,242 in the third quarter of 2009 – an increase of  28.2% on the same period a year ago. The figures consisted of 12,390 Individual Voluntary Arrangements (IVAs), an increase of 20.9% on the corresponding quarter in 2008, 18,347 bankruptcies, representing an increase of 6.4% on the corresponding quarter last year and 4,505 Debt Relief Orders (DROs).

Bev Budsworth, managing director of The Debt Advisor and Credit Today’s 2008 ‘Debt Counsellor of the Year’ and ‘Personal Insolvency Practitioner of the Year’, commented: “In some ways it is a positive in that the increase in the number of insolvencies means that people are getting the type of structured help and support they need to pay off their debts. However, looking at the figures, we have already seen over 98,000 personal insolvencies this year which is close to the total figure for 2008. It’s clear that we still are experiencing the ‘debt hangover’ from a decade or so of spend, spend, spend mentality and we are likely to see close to 130,000 insolvencies in 2009 alone.

“We are seeing a rise in the impoverished middle classes – professionals badly hit by the recession who know of nothing but a relatively ‘comfortable’ lifestyle. As the recession bites, companies are cutting their spend on professional consultative services and therefore these people are seeing their income streams dry up, some of them for the first time in their lives. According to the Building Societies Association (BSA), nearly half of people cite loss of job or income as the reason for mortgage arrears. For these people, debt management plans are a good way of getting them back on their financial feet in time for when the market eventually improves.

“As the level of trust for banks continues to wane, more people are turning to their mortgage advisor if they get into financial difficulty, rather than their bank manager. This has, in turn, lead to an increased number of mortgage brokers adding non-lending solutions to their product portfolios as remortgaging is no longer the best option. The vast majority of underwritten mortgages come through an intermediary or broker, so it is encouraging that they are supporting their clients through tough times. The increase in IVAs is proof that they are regarded as ‘fit for purpose’ allow people to pay off as much of their debt as they can afford in a structured way, whilst keeping the roof over their heads.

“Launched earlier this 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 fully expect levels to reach around 11,000 by the end of the year and run at about 16,000 for 2010.

“The level of bankruptcies remains high which leads me to believe that recent reports of ‘bankruptcy tourists’ may be a contributing factor to these figures. The UK has been seen as a more attractive place for foreigners to declare themselves bankrupt as the Enterprise Act 2003 reduced the discharge period from three years to one. This is far lower than some of our European counterparts, so it’s not surprising to see some UK firms openly market bankruptcy services to cash-strapped, debt-ridden Europeans.”

The number of company liquidations reached 4,716 in the third quarter of 2009 – a decrease of 4.7% on the previous quarter but an increase of 14.6% on the same period a year ago. The figures consisted of 1,301 compulsory liquidations, a decrease of 9.8% on the previous quarter and 12.9% on the corresponding quarter in 2008 and 3,415 creditor’s voluntary liquidations (CVL), representing an decrease of 2.6% on the previous quarter but up 30.2% on the corresponding quarter of the previous year.

“The level of corporate insolvencies has dipped slightly however, already this year, 19,602 businesses have been declared insolvent which is very close to the total figure for 2008. I think we are likely to exceed 25,000 businesses folding by the end of this year. Many of our 4.7 million small businesses are finding it difficult to source funds at the moment, especially if they have a weak balance sheet and limited reserves that are continually being eroded by falling sales and bad debt. However, we are continuing to see a steady number of businesses that have simply ‘lost their way’, do not have up to date figures and are trading blindly. These businesses have clearly taken their eye off the ball for one reason or another and what they need is sound advice from someone who has ‘been there and done that’ to get them back on track.

“On the bright side, Company Voluntary Arrangements (CVAs) are on the increase. The CVA can protect the business, allowing it to retain its assets and provide for debt forgiveness. It can also save the directors thousands of pounds as personal guarantees do not crystallise and, most importantly, creditors can get some of their money back.

“Specific sectors do tend to be faring worse than others, as you would expect. The retail sector has been badly hit with many high streets resembling ghost towns rather than bustling shopping centres. Large stores and clothing retailers have been worst hit with Experian reporting that 15% of all shops on the high street could be vacant by the end of the year. The problem is compounded by an apparent reluctance for shoppers to spend, resulting in the second consecutive month of flat retail sales. Consumers need to spend sensibly, but nevertheless spend, to keep our high street shops alive.

“The construction sector is also suffering badly with a record level of 16% contraction expected to be seen by the Construction Products Association for 2009. Many smaller companies in the sub-contractor supply chain are seeing their margins squeezed and constantly eroded. We speak to construction companies who are fooling themselves by buying in contracts, almost at any cost, just to keep the income coming in.

“I always explain to clients that they need to eat, sleep and drink their business plans and ensure that it is built on sound financial platforms.  Whilst I do believe that we are not doing enough to help our small businesses, which represent over 50% of our GDP, I still believe that sound business ventures will get funding. There are pots of capital and start-up funding to be had.”