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COMMENT
Figures released today by the Department of Trade and Industry (DTI) show that bankruptcies and insolvencies have hit an all-time high. The DTI revealed that, in the last quarter of 2005, 13,501 people were declared bankrupt and a further 6,960 adults entered into a form of insolvency known as an Individual Voluntary Agreement (IVA). Bankruptcies were up 38% compared to the same period in 2004, while IVAs soared by 117% compared to Q4 2004. In total, 20,461 insolvencies were recorded in the final quarter of last year, making the annual figure a record 66,466. Although bankruptcies outnumber Individual Voluntary Agreements by two to one, entering into an IVA is often seen as a better alternative to declaring oneself bankrupt. Under an IVA, borrowers agree to pay a fixed monthly amount over an agreed period, subject to approval by three-quarters of their creditors. In return, the interest on their debts is frozen, and some of their debt -- in some cases, up to four-fifths (80%) -- is written off. Furthermore, the number of company failures is also on the rise: 3,187 firms went into liquidation in England & Wales in the third quarter of 2005. Then again, this is up only 9% on comparable figures for 2004, so companies aren't going bust at anything like the rate that we individuals are. Of course, you'd expect that the lending boom which began roughly a dozen years ago would lead to a rise in credit problems. However, these figures are even higher than those recorded in the recession of the early Nineties, which raises questions about the underlying health of our personal finances. The breadth and depth of our borrowing habit have increased considerably, as relaxed lending standards have led to a rise in both the number of borrowers and the overall amount that individuals can borrow. Indeed, as I warned last month in Twelve Years Of Binge Borrowing, the UK has become a nation of credit junkies, with millions of us using credit to support lifestyles. In other words, we have "Champagne tastes and a beer income", as my father often says. Naturally, this borrowing binge creates victims, as over-indebted people struggle to meet rising debt repayments and their finances begin to spiral hopelessly out of control. One reason for the recent boom in bankruptcies is that the laws governing bankruptcy were relaxed almost two years ago. Until April 2004, anyone becoming bankrupt had a wait of at least three years before they could be discharged by their trustee. The new Enterprise Act cut this waiting period to one year, which has led to criticisms (mostly from lenders and associated organisations) that some people see bankruptcy as a "soft option" or "lifestyle option". However, as this article explains, although the "B word" no longer carries the social stigma and embarrassment that it one did, it isn't to be taken lightly, because it seriously damages your financial life --and you could even end up losing your home. So, if you're struggling to meet ends meet and easy credit has turned into difficult debt, what are the alternatives to bankruptcy? You could opt for an Individual Voluntary Agreement, which doesn't cover secured debts (which have to be repaid in full), so your house isn't at risk. On the other hand, IVAs are only suitable for full-time employees who owe at least, say, £7,500 to three or more lenders. Furthermore, IVAs are expensive to arrange, at a typical cost of around £6,500. Ouch! Alternatively, you can attempt to tackle the problem yourself by increasing your income, reducing your outgoings, and throwing all your spare cash at your debts. These articles will help you to do just that: Good luck with putting your finances on the straight and narrow! More: Get help in our Get Out of Debt centre and Dealing with Debt discussion board.
