Personal Insolvencies: A Flash in the Pan or the Shape of Things to Come?

If you’ve been keeping up with current events you’ve probably read something about the burgeoning UK credit bubble and the danger many experts believe every-growing levels of personal debt poses to both millions of individuals and the nation as a whole. In some cases people with excessive levels of personal debt will manage to take hold of the dragon’s tail and bring their situation back under control. In many other cases though personal insolvency awaits. In fact, recently released figures show that during the first quarter of 2017 personal insolvencies increased to their highest level in nearly three years and experts warn this may be just the tip of the iceberg.

Losing Ground

From January to March of 2017 there were more than 24,000 personal insolvency cases filed in England and Wales. That’s an alarming 15.7% increase over the same period last year and nearly 7% higher than previous quarter. All told it was the highest number of personal insolvency cases since 2014 when many who had rung up enormous debts while trying to survive the financial crisis were forced to finally throw in the towel. 2014 also happens to be the year when many Brits stopped paying down their debt in the wake of the financial crisis and started charging again.

While it’s likely that many recent insolvency cases are people who went back on a diet of easy credit over the past few years there are other potential causes as well and none of them bode particularly well for the future. Take inflation for instance: The annual inflation rate last year was 2.3% and is projected to rise to 3% or slightly more this year. At the same time wages only grew 1.9% last year and there are no indications companies plan to boost wages in 2017. When inflation was nearly non-existent 1.9% wage growth, while anaemic, was still enough to keep pace. But that’s no longer the case. As a result many working families find themselves falling behind and looking to credit cards and payday loans to make up for the shortfall.

Avoiding the Credit Abyss

Financial planners and debt advisers agree that the sooner a person recognizes debt is becoming an issue the greater their chances of avoiding personal insolvency. There are any number of free services out there that will provide advice on how to turn things around if it’s not already too late. However, if you are at a point where you believe you won’t be able to repay your current debt these same advisers can counsel you on the most appropriate path to take.

  • Bankruptcy – In the event you find yourself unable to pay your debts you may need to file for bankruptcy and you should seek financial advice without delay. As mentioned there are any number of free services available that will help you sort out your credit mess and determine the right way forward (we list a number of those agencies at the bottom of this post). If you are at the point that you are contemplating bankruptcy and have contacted an adviser you should notify all your creditors and ask them to halt any actions against you while you work out a plan with that advisor. If you deal with creditors in good faith you will find most are willing to work with you to find a reasonable solution.

There are certainly cases where bankruptcy will be the best and perhaps only option but in less severe cases there may be other ways forward, including:

  • Individual Voluntary Arrangements (IVA) – If you live in England or Wales an Individual Voluntary Arrangement or IVA might be the right solution for you. In short the IVA procedure is one wherein an individual renegotiates payments to their creditors with the aim of finding a realistic way of honouring the debt. The IVA must be overseen by an insolvency practitioner and the final IVA must be approved by 75% of a person’s creditors in order to be considered legally binding. Once the IVA is approved you will switch from paying creditors directly to paying the insolvency practitioner who will then divide the money among your creditors according to the terms of the IVA. If your creditors reject your proposed IVA it will be understood that the original debt conditions still apply. Keep in mind that you can enter into an IVA whether you’ve already filed for bankruptcy or not and that IVAs are not available in Scotland.

 

  • Debt Relief Order (DRO) – The Debt Relief Order is yet another alternative to bankruptcy and first became available in England and Wales in 2009. It is intended to help those who have less than £15,000 in personal debt and less than £50 in disposable income they would be able to put toward debt payments every month. In order to be considered eligible for a DRO the person would also need to have less than £300 worth of gross assets. If you own property either alone or in partnership with someone else you are not eligible for a Debt Relief Order.

Speak to a debt adviser at one of the organizations listed here to find out more about your options regarding bankruptcy, IVAs or DROs.

Keep in mind that insolvency is not inevitable. If you recognize your debt problem early enough you should be able to take remedial steps to avoid the credit abyss and return your financial life to a solid footing. However, even if things have spiralled out of control there’s no reason to panic or presume the worst. Instead, speak to a qualified debt adviser and let them help you devise a plan of action.