“Business is booming,” boasts a firm of insolvency accountants; record numbers of people went bankrupt last year.
Last month Manchester-based Begbies Traynor issued a press release saying new work was up 35 per cent on the previous 12 months and that “business is booming at Britain's busiest firm of liquidators”.
Figures released by the Department of Trade and Industry last week show that 46,651 people became insolvent in 2004, with 80 per cent entering bankruptcy and the remaining 20 per cent making a legally binding individual voluntary arrangement (IVA) with their creditors to write off some of their debt.
This 46,651 figure was up 31 per cent on 2003, also a record year. That year had the largest number of personal bankruptcies since records began in the 1960s. The rate appears to accelerating. In the fourth quarter of 2004 alone, there were 13,013 insolvencies, 9,803 bankruptcies and 3,120 IVAs. The total of those three figures was up 34.6 per cent on the comparable period in 2003.
The government is not putting all the blame on Britain's exploding consumer debt, which topped £1,000bn last year. The DTI's action plan, Tackling Over-indebtedness, which was released in July last year, said late payment of household bills was more common than consumer credit arrears.
Interest payments accounted for about 7 per cent of an average household's disposable income, which was significantly below the average in the early 1990s when interest rates were up to three times greater.
Research used by the DTI for its action plan showed that 68 per cent of people in 2003 did not consider their debts to be a problem (the highest figure since 1995). Only 10 per cent said their debts were a heavy burden, which was in line with previous years.
Comparatively low interest payments have reflected unusual economic conditions, and the Bank of England has started to raise rates only in the past 15 months. The five rate rises of a cumulative 1.25 percentage points, however, have started to have an impact. Barclays Capital estimates that, if interest rates rise to 5 per cent from their low of 3.5 per cent in November 2003, households' disposable income will be cut by 4.7 per cent through higher credit repayments.
Households are already on a knife-edge because the ratio of personal borrowing to income doubled between 1995 and 2003 and the average level of outstanding consumer credit increased from £2,088 in 1995 to £6,464 in 2003.
Citizens Advice says most people get into financial distress through only a modest change in financial circumstances. It has seen a 74 per cent jump in debt inquiries in the past seven years. A significant proportion of the record 1.1m people who asked for advice on handling debts last year did so as a result of a cut of only 10 per cent in their annual income.
Citizens Advice says irresponsible lending is partly to blame. There are now 66m credit cards on issue with an average debt per cardholder of £1,360, according to the Association for Payment Clearing Services (Apacs). Despite this, it adds, the default rate has remained fairly constant at about 0.35 per cent of accounts. But there is a hidden cost to personal bankruptcy, with credit card companies forced to recoup the costs of written-off debt through higher interest rate charges.
The British Bankers' Association has calculated the hidden cost of bankruptcy to theaverage person, by expressing credit companies' figures for bad debts as a percentage of their gross profits. The figures were 28 per cent in 2002 and 22.7 per cent in 2003. This improvement is partly down to banks using risk-based pricing models. The most creditworthy customers face interest rates of just 6 per cent and discharged bankrupts able to receive some credit up to 24 per cent to 49 pc.
Stewart Dickey, a director at the British Bankers' Association, says the emphasis of the Banking Code, a voluntary code of good banking practice, is to treat people sympathetically and “bend over backwards to help customers renegotiate” their debts. He adds that automatic increases in credit limits no longer happen, a move that followed recent criticism from the Commons Treasury committee.
Dickey says bankruptcy is seen now as being slightly easier to handle, but that only a “tiny minority” see it as a “lifestyle” choice. Following a change in the Enterprise Act, which came into force last April, bankruptcy is now less painful. The average bankruptcy period is now just 12 months instead of three years. Despite this relaxation, specialists say bankruptcy can last for up to 15 years and is still seen by most people as a final option carrying a social stigma.
County courts, which oversee most personal bankruptcies, can also order people with assets not vital for life or work, such as a car or house, to be sold to repay creditors. They can also order part of a disposable income to be paid to creditors for three years.
But being bankrupt does not necessarily mean you will not get access to financial services such as a bank account. Some banks such as Barclays and Co-operative banks offer a basic account to those with discharged bankruptcy court orders.
“It takes time to build up a credit history, and being discharged is not the end of people's difficulties [in getting a mortgage or further loans],” says Dickey.
Given the relatively low fees required to go bankrupt it carries a fee of just £150 and a deposit of £310 and requires a court to appoint an official receiver consumers riddled with debt are recommended to seek professional advice from Citizens Advice or a licensed insolvency practitioner before they take this difficult decision.
