COMMENT
Is Greed The Cause Of Debt?

By Jane Mack (TMFJane)
August 18, 2005

It's usually been thought that the reason most people get into trouble with debt is because of a life-changing event such as divorce, ill health or unemployment. In other words, serious debt problems are mainly caused by unforeseen events rather than reckless spending.

But new research seems to indicate that our 'buy now, pay later' culture, could now be the principal reason behind a recent surge in bankruptcies and Individual Voluntary Arrangements (IVAs).

Figures released earlier this month by the Department of Trade and Industry showed that the number of people who have gone bankrupt or entered into an Individual Voluntary Arrangement (IVA) in England and Wales in the last year reached 54,227 - the highest number of personal insolvencies in a 12-month period.

In part this could be explained by recent changes to bankruptcy laws which now enable people to be discharged after just one year. In a sense, it's now 'easier' to go bankrupt than struggle with miserable debts that have become overwhelming and it's also not seen as such a stigma these days so people are more prepared to consider it as a solution.

Individual Voluntary Arrangements have also increased massively with 4,199 people using this process in the second quarter of 2005 - a 69.6% increase on the same quarter in 2004. An IVA is designed to be an alternative to bankruptcy so that creditors can get more of their money back than they would from a bankrupt and to enable the debtor to get debt relief while stopping just short of bankruptcy.

But last month, PricewaterhouseCoopers decided to analyse 500 of voluntary arrangements to find out what has caused the surge. They found that while 58 cited relationship breakdown and 52 unemployment as the cause of their debt problems, an astonishing 372 people said it was simply because they had spent more than they earned.

According to Citizens' Advice, it is now not uncommon for them to see people who have somehow managed to amass debts of more than £100,000 - a figure I find quite astounding. It would be easy to blame irresponsible lending but there's got to be an element of irresponsible borrowing in there too?

In recent years lenders have been forced to improve the transparency of interest charges, fees, warnings about how your home may be repossessed if....etc. But perhaps we're still not getting the message.

You may be familiar with Mr Micawber's warning in the Charles Dickens novel, David Copperfield: "Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." I sometimes wonder if that quote should be written over the door of every lending institution in the country!

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