Finance
Background to the Debt Crisis in the UK
One in five people in the UK who have unsecured debt of more than ?10,000 are reportedly considering insolvency. Indeed, a record 26,000 people in England and Wales became insolvent during the second quarter of 2006 and it appears that the UK is heading for an astonishing 100,000 personal insolvencies during 2006 as a whole. Perhaps it?s not surprising that many people are openly talking of a debt crisis in the UK.
Personal debt exceeded the psychologically important ?1 trillion barrier in 2004. Since then the level of personal insolvencies has been rising steadily, as consumers face what many have called the ?debt crunch?.
Personal debt rose dramatically during the boom years of the 90?s with easy credit and rampant spending. High levels of employment, low interest rates and booming prices were no doubt a contributory factor, but many argue that some credit lenders acted irresponsibly in fuelling the debt boom. The major banks are certainly paying for the UK?s unsecured debt problems, with five major high street banks announcing that their profits had been hit by bad debt.
Another factor in the record number of insolvencies is a change to the UK?s bankruptcy laws, and the growth in popularity of the IVA or Individual Voluntary Arrangement.
In April 2004, the Enterprise Act reduced the period of bankruptcy 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 allowing people to simply walk away from their debt problems. This is especially the case, for people who don?t have to face the prospect of losing their homes, or who aren?t in a profession or career for which they could lose their job if they became bankrupt.
The rise in popularity of the IVA has also been cited as a factor in the high levels of insolvencies in the UK. In an IVA an insolvent person can avoid bankruptcy by reaching an agreement with their creditors to have their debt frozen and up to 80% of their debt written off. People pay what they can afford into a fund managed by an Insolvency Practitioner and after the period of the IVA an individual walks away debt free.
The IVA has been available since 1986, but has grown in popularity in recent years as specialist debt advice companies have marketed the IVA as an alternative option to bankruptcy which will allow them to keep their home.
Other factors that could further fuel the UK?s debt crisis during 2006 include a surge in utility bills, fuel costs, council taxes. In August the Bank of England increased base interest rates by a quarter of one percent to 4.75%. Many are saying that people who have been struggling with debt problems will be pushed over the edge during 2006.
Anyone who faces the prospect of insolvency, or can no longer cope with their debts is urged to seek professional debt advice from an Insolvency Practitioner.
Diana Middleton writes on matters relating to debt advice in the UK, and especially debt problems. She is particularly interested in personal finance, writing on best approaches to getting a secured loan, and the background issues relating to debt consolidation. |
Diana Middleton
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