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Southport Reporter® covering the news on Merseyside.

Date:- 05 February 2007

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IVAS fast catching up bankruptcies as preferred method of sorting debt

THE number of UK personal insolvencies continues to increase with 29,804 individuals entering into bankruptcy or an “Individual Voluntary Arrangement” (IVA) during the final quarter of 2006. The figures issued by the Insolvency Service and analysed by Grant Thornton's Recovery & Reorganisation practice represent an increase of 7.1% on the previous quarter, reaching a total of 107,288 for 2006, up almost 60% from the previous year's figure of 67,584.

The figures also show IVAs fast catching up bankruptcies to become the insolvency procedure of choice for resolving serious debt issues with 12,741 IVAs for Q4, compared to bankruptcies numbering 17,063. For the year the total number of IVAs has more than doubled, from 20,293 in 2005 to 44,331 in 2006. This compares to bankruptcies rising by 33%.

Phil Hall, Press & Public Affairs Manager at the IFS School of Finance, told us that:- "Society has also got harder for younger people. It is hard to say that it is just down to the consumer of the services. Young people are more use to debt now then ever as it is now seen as part of life. Most young people have to pay off of ever-increasing education fees and other educational costs and it is not uncommon to see young people £20,000 to £30,000 pounds of debt before they start thinking of any other ideas like getting a house. Add to this the ever increasing house prices, it is no wonder why young people have to take out larger mortgages to get on to the property ladder and do not think of the consequences. Then they are being told to save for a pension and this puts massive pressure on finance.

We are building up more problems for the future and we need to act now or it will be too late. What we are seeing is the younger generations in our country losing the fight to keep financial control and this will have a huge impact on our nation’s future.

It will not only be our younger people’s financial futures that are at risk, but also the nation’s and with it the people’s, health and standard of living as a result of the ever increasing national debt.”

Les Ross, Recovery and Reorganisation Partner at Grant Thornton, Liverpool, said:- "Rising personal insolvencies are, in the most part, fuelled by consumers who borrow to spend, struggle to repay what they've borrowed and then quickly find themselves caught out in a spiral of debt they can't escape from. The problem is at such a serious level that almost 300 people are becoming insolvent each day.

The problem has been heightened by increases in the cost of living with rising utility bills, council tax and interest rates biting where it hurts. However, with the Bank of England reporting that lending to individuals in 2006 increased by over 10% to £11.6 billion, the problem is clearly a long way from being resolved."

The Financial Services Authority added:- “Another problem young people are being hit by a lack of understanding about the huge amount of jargon used by financial institutions and it is a government and industry responsibility to help the consumer to better understand the jargon.

Sadly with financial institutions centralising their operations, it has made it harder and harder to get help and get information. This is having unintended consequences and the effects on some, that is now proving to be very costly.”

Commenting on the rapid increase in IVAs, Ross cites the advantages of becoming debt free within a set amount of time, typically five years, and the absence of a bankruptcy's more restrictive terms as reasons for their attractiveness. He also added that the return to creditors in IVAs offer a clear advantage in comparison to a bankruptcy.

"Over the past few days, some UK listed IVA providers have issued profit warnings through market trading statements. While these may reflect issues inherent to those businesses, they certainly don't reflect what is happening to in the market. IVAs are not about to dry up nor reduce in numbers for the foreseeable future as the UK personal debt problem is far from resolved."
said Les Ross.

Ross also points to recent figures from the Council for Mortgage Lenders that show a 65% rise in repossessions to 17,000 in 2006 as further evidence of the extent of an escalating debt problem.

"The vast majority of today's repossessions, which typically represent the last resort in a personal insolvency case, are born of the insolvency proceedings of 2005. With the huge insolvency levels seen last year, repossessions in 2007 are heading in no other direction but up.

Most of the time, it needn't ever come down to losing one's home as IVAs regularly offer the best option by facilitating a repayment agreement between debtors and creditors while freezing the debt and safeguarding possession of the house. However, with insolvencies on the rise we expect repossessions will close in on 20,000 before the end of the year."
says Ross.

The Financial Services Authority added:- “The mass advertisement campaigns and branding going on in the media is increasingly tempting people to fall into the debt trap, as they go with the flow and do not read all that is involved or think ahead.

There is also a huge amount of adverts for IVA’s and other simpler ideas are leading more and more people to think it is ok to spend more making it harder for those court in the middle to get problems resolved. IVA’s can be very good forms of help, but they can also prove very costly, if taken on blindly. They can lead people to no other choice, but bankruptcy or in some cases worse.”

Phil Hall of the IFS School of Finance added:- “One interesting development is that the FSA is now pushing to get financial groups to treat customers reasonably and this is having an impact now on the sector. It has already seen some banks and other financial groups being fined; sadly though it still comes back to a lack of financial understanding by customers as a whole.

What shocked me was a survey I read a few weeks back about how young people pick credit cards. A question was put forward to a large group of young people asking what is a better card a 15%APR and another at 30%APR? The results revealed more picked the 30% card as they thought it must be better as it cost more! I will stress Credit cards are not evil and if used correctly can be a huge help.

This lack of understanding is very worrying and what the government does not understand is that some one good at Mathematics does not mean they are good at understanding finance.”

Ross continues:- "2006 corporate insolvency levels have been more or less consistent with the last couple of years and all signs are pointing to more of the same for 2007 when we believe business insolvencies will reach around 13,000."However, said Ross, administration appointments which tend to affect larger corporate (as opposed to liquidations) were subject to an increase.

"Q 4's 119% administrations increase on the previous quarter (57% for the year) is attributable to Grant Thornton's recent appointment as administrators of 844 companies created and managed by tax solutions provider Asciom Solutions Limited and Safe Solutions Accounting Limited - the largest ever single administration application (by number of separate limited companies involved) in UK corporate insolvency history. If this is excluded, there would actually be a quarterly decrease of 6% (compared to Q3) and a 20% rise on 2005"

Given challenging trading conditions in parts of the economy, Ross believes that the lack of more dramatic rises in insolvency levels are attributable a stronger restructuring culture. "It's not that UK businesses are not feeling the pinch, it's that more and more companies under financial pressure are being restructured, with actual insolvency only seen as a last resort.

In the current environment re-financing options for struggling businesses are widely available, and in particular we are seeing more players such as private equity houses and hedge funds viewing the distressed debt market as an opportunity. In a very liquid market, cash rich lenders are willing to listen to any good restructuring plan - these days if a business can be saved it will be.

For 2007 I expect retail businesses, bars and restaurants, food suppliers facing increased pressure from the major multiples and component suppliers to motor manufacturers to feature at the sharp end. Restructuring and in some cases insolvency will find plenty of scope in each of these sectors."

One local business owner who does not want to be identified said:- “There is a dearth of sensible and immediate advice for small businesses and sole traders who find them selves with problems. What small businesses receive is often conflicting and very confusing information, which can lead to far bigger problems as they try and work out what is and what is not correct. This is not just confined to independent financial advice, but also for legal support, which often have huge financial implications. This again puts an increasing pressure on the economy and often small businesses, which are the seed corn of the nation, get over looked. If they find times hard so do the employees and this can have major repercussions for the nation economy. Often small businesses are owned by individuals and as such when a sole trader has a problem financially, the figures do not show up as problems with business and thus the true picture gets masked.  However, a sole trader is denied the help from institutions who support individuals on a personal basis and institutions who support business are often unwilling to help.”

Do you think adverts for Credit Cards and other borrowing services should be banned from advertising on TV?

Do you think that more information should be given on adverts offering borrowing services?

Do you feel that adverts by companies offering AVIs should be band?

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