Personal bankruptcy and insolvency problem

A decade of economic stability and rising house prices was built on the back of credit. The bubble has now burst, lenders aren’t lending and consumers are struggling with financial difficulties and personal debt issues. Many consumers are pursuing debt solutions, such as personal bankruptcy or Individual Voluntary Arrangements, to escape their plight and avoid creditor harassment.

The Scale of Financial Difficulties and Personal Debt Problems

According to research published by AXA, 3.7 million individuals are struggling to maintain payments on credit card debt. AXA also stated that 1.02 million people have borrowed more than they can afford to repay and are struggling to make mortgage repayments. In all, 11.6 million adults are dealing with financial difficulties and high levels of personal debt.

The Citizens Advice Bureau (CAB) dealt with 1.9 million clients with 5.54 million issues. Of these, 1.7 million (31.3% of enquiries) were in relation to financial difficulties and personal debts. Figures provided in relation mortgage and secured loan enquiries in Q2 of 2008 showed a 58% increase. There was also a 10% increase in personal debts in relation to fuel bills.

The Growing Burden on the Insolvency Service

The Insolvency Service said that there was a staggering 27,087 individual insolvencies in Q3 of 2008 in England and Wales. This represents an increase of 8.8% in personal bankruptcy figures on the previous quarter and an increase of 4.6% on the same period 12 months earlier. Leading accountancy firm, KPMG, predicts 110,000 personal insolvencies by the end of 2008 and 150,000 personal insolvencies during 2009.

Alternative Debt Solutions

Private debt management companies are one of the few areas of the economy that are doing well from the recession. Debt solutions, such as Individual Voluntary Arrangements, personal bankruptcy and debt management plans, are proving extremely popular with debtors. Debt solutions helps consumers to either manage or write-off debt, as well as helping to prevent creditor harassment.

Of the 27,087 insolvencies in Q3 2008, 9,746 were Individual Voluntary Arrangements, representing an increase of 3.3% comparative to the previous quarter. An Individual Voluntary Arrangement represents the principle alternative to personal bankruptcy. A home owner that is struggling with personal debts may be better served pursuing this debt solution than declaring personal bankruptcy.

With some experts projecting that unemployment will reach 3.1 million or 10.1% of the population, more consumers are certain to struggle with financial difficulties and rising personal debts. Those struggling to pay personal loans and credit card debts are advised to seek debt counselling so that a suitable action plan or debt solution can be identified.

Debt Solutions – Pros and Cons

Research by Grant Thornton showed that the total outstanding UK consumer debt amassed through mortgages, loans and credit cards has increased by 7.3% to £1.444 billion over the past year. Many people who are struggling with financial problems and serious debts turn to a debt solution to help them become debt free. Is this a sensible idea?

Advantages of Debt Solutions

• Write off or manage debts. Some debt solutions, such as an Individual Voluntary Arrangement or personal bankruptcy, will allow someone to write off debt;
• Stops creditor harassment. An Individual Voluntary Arrangement is a legally binding agreement so no creditor can pursue someone regarding personal debts. A debt management plan, although a voluntary agreement, will normally prevent creditor harassment;
• Prevents personal bankruptcy. A debt solution can be introduced relatively quickly and, once creditors know they will be receiving a payment, most would rather that than receive nothing by declaring a debtor bankrupt;
• Affordable monthly payment. Signing up to a debt management plan or Individual Voluntary Arrangement means that a debtor can put all forms of unsecured debt, such as credit card debt and unsecured loans, under one roof. Better yet, a single monthly repayment is made which is disseminated to creditors on a pro rata basis;
• Removes stress and anxiety. Paying money into a debt solution may create bad credit, but it does allow a debtor to feel as though they are making in-roads into any serious debts. This can help someone to sleep more easily as a debtor knows that they will eventually become debt free.

Disadvantages of Debt Solutions

• No guarantee of creditor acceptance. Whilst most creditors will agree to a reasonable offer under a debt management plan or Individual Voluntary Arrangement, there is no guarantee that this will be the case. If a debt solution is rejected, it could result in personal bankruptcy;
• Credit report. A debt management plan or Individual Voluntary Arrangement will show on a credit report meaning that further unsecured borrowing is unlikely. This won’t really affect many people struggling with serious debts as most will already have bad credit and should avoid further borrowing;
• No debt write-off. Whilst a debt management plan can result in interest and charges being frozen, it doesn’t result in a debt write-off. It may be more viable to consider alternative debt solution, such as an Individual Voluntary Arrangement, where up to 75% of serious debt can be eliminated;
• Costs. The charges imposed by private companies for running debt management plans are usually about 15%. This reduces the amount that goes towards paying off unsecured loans and credit card debt. An Individual Voluntary Arrangement requires the appointment of an Insolvency Practitioner which can cost up to £7,000;
• Secured debts. It isn’t possible to include secured loans or mortgages in a debt management plan or Individual Voluntary Arrangement. Only unsecured debts, such as credit card debt, unsecured loans and personal overdrafts can be included.

A debt solution, such as a debt management plan or Individual Voluntary Arrangement , can help someone struggling with financial difficulties to become debt free. Tackling serious debts with further unsecured loans only serves to lead to further personal debt and creditor harassment.