The past decade has experienced a huge growth in the number of personal insolvencies – Back in 1998 there were less than 30,000 per year. In 2007 it is likely that over 145,000 will be declared insolvent. To put this in context that equates to the entire population of Oxford for the year or 400 people each and every day. This growth has given rise to many myths and misconceptions as to the reasons behind the growth.
Easy way out
Many lending institutions and indeed the press have pointed their finger at the Enterprise Act suggesting that it has become too easy for debtors. In actual fact the Act introduced no significant changes to Individual Voluntary Arrangements (IVAs) and if anything meant that the effects of Bankruptcy were harsher in respect of the duration of income contributions the bankrupt may be require to make and the restrictions that can be imposed if the individual’s conduct was dishonest, reckless or culpable. Even the government’s Insolvency Service states that the growth in insolvencies is not down to the changes brought about by the Enterprise Act.
The truth of the situation is that the growth in personal insolvencies reflects the realities in the economy and the huge growth in unsecured lending that we have witnessed in the UK since the early 1990’s. The UK now has five times more credit cards per person than our continental cousins and indeed at 75 million cards in issue more than one for every man, women and child. It is widely expected that there will be 100 million credit cards by 2009.
When this growth is coupled with the growth in mortgage lending the fact that Britons now owe over £1.3 trillion is no real surprise but it is worth considering however that this is equivalent of the combined GDP of the world’s poorest 150 nations.
This year’s fashion must have
In reporting their results to the City certain lending institutions have attributed weaknesses in their financial performance to the growth in IVAs and blamed this upon unregulated debt advice companies. Their press releases have been peppered with inaccuracies suggesting IVAs are “new and controversial” and that an IVA has become some sort of lifestyle accessory. These again are myths to be exploded – IVAs are neither new nor controversial having been brought about by the 1986 Insolvency Act in an attempt to address the poor returns creditors were receiving from bankruptcies. IVAs can only be signed off and administered by authorised insolvency practitioners (IPs). IPs are tightly regulated and required to comply with professional standards set down by their regulatory bodies and subject to regular inspection visits.
Portraying IVAs or bankruptcy as some sort of lifestyle choice is similarly far from the mark. Insolvency is a matter of fact – do your liabilities exceed your assets? Can you afford to pay your debts as they fall due? Whilst there may be individuals who borrow irresponsibly most people borrow money with the intention of paying it back. Insolvencies can generally be traced to a specific change of circumstances or an unfortunate chain of events. Whatever the cause of insolvency it is hugely stressful for the individual and their families and places strains on their health and relationships which have a societal cost in terms of cost of health care and the break up of families. Interestingly, research suggests that 90% of bankrupts are divorced or separated. For certain credit institutions to ‘cheapen’ the predicament that far too many Britons now find themselves faced with seems like a cynical attempt to point the finger of blame elsewhere.
It would be far more instructive for those institutions to look at ensuring that they are treating their customers fairly. I will look at this in more detail next month.
McCambridge Duffy are a leading personal insolvency practice in the UK and have been at the fore front of innovating to find the right solutions for debtors and creditors.