Fears increase over bankruptcy levels

Posted in 'Dealing with Debt' by Richard Catlin

15 January 2008

The number of people entering into all forms of insolvency - bankruptcy, sequestration, trust deeds and individual voluntary arrangements - is set to reach record levels in 2008. The cost of Christmas combined with higher food prices, above-inflation council tax rises, double digit gas and electricity bill increases and spiralling petrol and diesel costs will put some households under severe pressure and many will not be able to pay their bills as they fall due.

Overspending in the festive season only really begins to hit home once bills arrive in January, when repayment levels can become unmanageable for many consumers. Most credit card companies see the annual peak in missed payments in February, as the payment deadlines are missed by many.

2006 saw the number of people going insolvent break the 100,000 barrier for the first time, with that figure expected to exceed 110,000 in 2007. This is predicted to rise by a further 10,000 in 2008.

Individual Voluntary Arrangements (IVAs) - where according to the marketing spin, an independent insolvency practitioner negotiates reduced payments of up to 75% with creditors, are an alternative to bankruptcy, and typically take 3 to 5 years to complete.

The companies that operate these plans have been criticised by banks for not making consumers fully aware of the consequences of entering into an IVA, and for making exaggerated claims in their advertising.

Whilst most claim to be able to ‘reduce debts by up to 75%’, many lenders are now demanding that at least 40% of the outstanding debt is paid back in any arrangement. IVA’s also remain on credit files for a period of six years, and have as much impact on the creditworthiness of an individual as a bankruptcy. Indeed, with the relaxed laws on bankruptcy, many people will exit from bankruptcy much quicker than from an IVA. The only major difference is that it MAY be possible to retain your home with an IVA, though lenders are increasingly wise to the fact that they may insist on an IVA being secured by a mortgage over the family home.

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