Bad Debt Blues or Bankruptcy?
If you were doing the logical thing and sunning yourself on holiday at the start of August 2006 you may have missed some pretty scary news about personal debt in the UK.
As if from nowhere, a flurry of announcements arrived in the space of a few days.
The Bank of England raised interest rates for the first time in two years, making debts just that little bit harder to service in the coming months.
The DTI reported that IVAs (Individual Voluntary Arrangements) went up to 23,000 in the first quarter of 2006. That is a 73% increase over quarter one 2005. If you thought that sounded bad, the second quarter saw 26,000, a 66% rise.
HSBC, Barclays, Lloyds TSB and Royal Bank of Scotland all reported rises in impairment charges or provision against bad debts in the first half of 2006. To pick just one, Lloyds TSB set aside £632 million in the first half of 2006, that is a 16% increase.
Going back to June, it was announced that UK mortgage debt passed the £1 trillion mark and in May the debt counseling charity Citizens Advice issued a report explaining that the average person they help would need 77 years to repay their debts! Having just checked on a government website, I found that girls and boys born in 2002 have a life expectancy of 81 and 76 respectively.
Does this qualify as a serious problem?
If you are nevertheless unsure, consider this. In early 2006, the Office of Fair Trading told many credit card firms to cut their average default fees. As you may be aware, default fees can be pretty high and are a great source of revenue for the card firms. Losing this revenue was not part of the card companies plan, so they have been looking for ways to retrieve that lost income. Many have chosen to increase their interest rates. This will of course, impact many credit card borrowers and hasten the collapse of some families finances.
To help me with a little research, I logged on to a forum for people with debt problems in the UK. Rather amazingly, it appeared that the flavour of the month is to be declared a bankrupt. When I suggested the obvious (spending less and trying to earn more) I was abused with a torrent of angry posts for being unrealistic.
No matter how hard I try, I cannot seem to get away from the logic that if a person gets into debt by continually spending more than they earn, doing the exact opposite will (sooner or later) help them to escape these debts. Think of it as a financial diet.
An IVA is essentially a voluntary bankruptcy for an individual. instead of being forced into bankruptcy by a lender who is chasing the individual for repayment, the individual can opt out as it were. Once the IVA has been declared, the lenders are no longer allowed to chase these debts. The rules are clearly far more complicate than this, I am just trying to offer a flavour.
If you are anything like me, you probably think of bankruptcy as something that happens to entrepreneurs who borrowed millions to expand a business. It seems however, that now, any debts above £15,000 might be worth opting out of. Amazing.
In 2004 The Enterprise Act changed the rules relating to bankruptcy. It is now possible to be discharged in just one year instead of three. In other words, my new forum buddies seem to feel that bankruptcy is the least worst option. It seems that the act of repaying debts is now less alluring than bankruptcy!
I cant deny that I have an issue with this. Someone, somewhere will need to make good on those bad debts. Right now, it seems as though the responsibility will fall to shareholders in the major high street lenders. As a small shareholder myself, Im not sure I am too happy with this outcome. I had always been of the opinion that someone else paying my debts was unrealistsic.
in any case the outcome, I fear that the crest of this particular wave is nevertheless in the distance.