Bankruptcy still seen as ‘quick fix’ warns FH Debt Solutions
Figures published today by the Insolvency Service show the number of personal insolvencies reached 29,444 in the fourth quarter of 2008 - an increase of 8.2% on the previous quarter and 18.5% on the same period a year ago. The figures consisted of 10,344 Individual Voluntary Arrangements (IVAs), an increase of 5.9% on the previous quarter and 19,100 bankruptcies, representing a significant increase of 9.4%.
Bev Budsworth, commented: "It still concerns me that the levels of bankruptcies are continuing to rise rapidly. As house prices continue to fall and unemployment increases, there is a real sense of uncertainty for people. We have all heard recent reports of large-scale job cuts, pay freezes, wage reductions and general doom and gloom about the economy which really affects people's financial outlook. Coupled with negative equity and high utility costs, people are continuing to throw in the towel and opt for bankruptcy as a 'quick fix' for their financial problems.
"I believe the increase in IVAs does not accurately depict the real situation. I think that the festive period, coupled with the adverse weather in early December, simply made it more difficult to convene meetings with creditors, hence only a 5.9% increase. However, we have seen a definite change in the type of person opting for an IVA. Now, more than half of people on an IVA are homeowners (previously around a third) who are unable to consolidate their loans by refinancing or releasing any existing equity by selling their house. The average age of a person on an IVA is now in their early 40s, proving that serious debt does not discriminate and is a problem that affects all age ranges.
"The human cost of this problem is serious and growing. We are increasingly being approached by high net worth individuals from the city that have accrued large mortgages and outstanding debt and, due to losing their job, are struggling to meet all their repayments - even if their partner is still earning. These people are not receiving the help and support they need as household income is just above the threshold for various state benefits even though they have paid substantial amounts of contributions for most of their lives. Increasingly, these people are not meeting their repayments and perceive bankruptcy as the only way out."
The number of company liquidations reached 4,067 in the fourth quarter of 2008 – an increase of 11.9% on the previous quarter and 51.6% on the same period a year ago. The figures consisted of 1,562 compulsory liquidations, an increase of 4.5% on the previous quarter and 3,045 creditor's voluntary liquidations (CVL), representing a significant increase of 16.1%.
"I think the significant rise in corporate liquidations is not surprising. A recession often brings about a natural churn of businesses who are too debt laden to survive a downturn. Many of these also cannot take advantage of Company Voluntary Arrangements (CVAs) as their turnover has declined below a level to cover outgoings – hence the slight reduction. A CVA is a great tool to help businesses get back on their financial feet, as long as they have a reasonably healthy income. Unfortunately, loss-making businesses are generally wound up voluntarily by the directors or by creditors, through the courts.
"It is likely that insolvencies of businesses will continue to increase during 2009 by 25 - 30%, particularly due to reduced turnover and an inability to raise sufficient finance."
Bev concludes: "However, it's not all doom and gloom. I passionately believe that the UK has an excellent rescue culture. This culture is working and will help a lot of people in serious debt through the current recession. The debt management industry is continuing to improve and there is real evidence now that the new IVA protocol is working and that creditors are reducing hurdle rates as they become more debtor-friendly in order to avoid even more, irrecoverable, 'toxic debt'.
"Support for IVAs is essential, not least for the fact that the average return for an IVA is 39% of the debt, compared with over 80% of all bankruptcies returning nothing to creditors. For every 'statistic' there is a real person on an IVA or debt management plan that is determined to pay off what they can afford. These plans are not a 'cop out', they are a structured way to get that individual back on their financial feet."
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