According to reports, one in five people in the UK who have unsecured debt of more than £10,000 are considering insolvency. In fact, a record 26,000 people in England and Wales became insolvent in the second quarter of 2006 and it appears that the UK is heading towards a staggering 100,000 personal insolvencies for the whole of 2006. Perhaps not surprisingly, many people talk openly about a debt crisis in the UK.
Personal debt broke the psychologically important barrier of £1 trillion in 2004. Since then, the level of personal insolvency has been on a steady rise as consumers grapple with what many have called the ‘debt crisis’. .
Personal debt rose dramatically during the boom years of the 1990s with easy credit and rampant spending. High employment levels, low interest rates and booming prices were undoubtedly a contributing factor, but many argue that some lenders acted irresponsibly in fueling the debt boom. The major banks are undoubtedly paying for the UK’s unsecured debt woes, with five major high street banks announcing that their profits have been hit by bad debts.
Another factor in the record number of insolvencies is a change in UK bankruptcy laws and the rise in popularity of the IVA or Individual Voluntary Arrangement.
In April 2004, the Companies Act reduced the bankruptcy period from three years to one. Although the stigma of bankruptcy is still strong for some, many people argue that bankruptcy has become too easy an option that allows people to simply walk away from their debt problems. This is especially the case for people who do not have to face the prospect of losing their homes, or who do not have a profession or career for which they could lose their job if they filed for bankruptcy.
The rise in popularity of VAT has also been cited as a factor in the high levels of insolvency in the UK. In an IVA, an insolvent person can avoid bankruptcy by reaching an agreement with their creditors to freeze their debt and cancel up to 75% of their debt. People pay what they can afford into a fund managed by an insolvency practitioner and after the VAT period, the person goes debt free.
VAT has been available since 1986, but has gained popularity in recent years as specialist debt counseling companies have marketed VAT as an alternative to bankruptcy that will allow you to keep your home.
Other factors that could further fuel the UK debt crisis during 2006 include an increase in utility bills, fuel costs and council taxes. In August, the Bank of England raised base interest rates by a quarter of one percent to 4.75%. Many say that people who have been struggling with debt problems will be pushed over the edge in 2006.
Anyone facing the prospect of insolvency, or who can no longer deal with their debts, should seek professional debt advice from an insolvency practitioner.