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
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
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
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
"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.
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
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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