We are in tough times. The biggest round of spending cuts since World War II has just been announced and there are an estimated 490 000 public sector job losses to come. Cash is short and after years of readily available credit, already high personal insolvency levels may reach new heights. It is now time to start repaying the debts and begin living on a tight budget.
Over the course of the last ten years the number of individuals entering a formal insolvency process has increased more than 300%. That is a staggering figure but what is considerably more worrying is the estimated number of individuals entering informal debt management arrangements with their creditors. This is estimated at approximately 500,000. According to R3, the Association of Business Recovery professionals, there are an estimated 961,000 individuals in the UK struggling with debt.
There are two major differences between a formal insolvency process and a debt management arrangement. A bankruptcy or individual voluntary arrangement (IVA) typically lasts between one and five years and, at the end, any balance of outstanding unpaid debt is written off.
A debt management arrangement lasts a great deal longer – 10 years or more, and there is no guarantee that any part of the debt will be written off. They are informal plans that can be changed by the creditor at any time and this can include an increase in the amount of the monthly payments. These informal arrangements are only a way of delaying dealing with debt and do not tackle the core issue. The main purpose of a strong and positive debt relief procedure is to allow the individual to look forward to a financial future and in my view, debt management arrangements do not.
Of course, with re-mortgage options now largely unavailable many people are turning to these debt management arrangements as a way of providing short term relief, but it is only that – it does not deal with the main issue, debt repayment, and/or debt forgiveness.
The average age of an individual falling bankrupt in the UK is falling. In 2005 it was 41, now it is estimated to be 38. This means that if someone has entered into a debt management arrangement they may not come out of it until they are nearing 50 and then they may still have further debt to repay.
By 50, pension considerations are clearly much more urgent, and my concern is that if debt is not dealt with now we are in danger of finding ourselves faced with a large proportion of the population who have not had time to rebuild their financial future, and thus will not able to provide for their old age. This will only prove an added burden to the already austere Government budget. As the spending cuts begin to take effect, individuals will need to seriously consider their options – bankruptcy and IVAs may prove the saving grace for many.
Louise Brittain is a partner in Deloitte’s contentious insolvency group
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