November, 2009

As unemployment and debt problems have worsened this year, the number of people struggling with their debt management has risen dramatically – reflected in the latest insolvency figures released today.

Personal insolvencies in England and Wales were up by 28.3 per cent over the last twelve months according to figures from the Insolvency Service.

During the third quarter of 2009, the number of people becoming insolvent leapt to 35,242, a 28.2 per cent increase on the same period of last year and an increase of 6.6% on the previous three months.

This figure is compiled of 18,347 bankruptcies, 12,390 people entering individual voluntary arrangements (IVAs), and 4,505 people taking out the government’s new solution aimed at those with fewer assets and minimum incomes – debt relief orders (DROs).

The number of IVAs – where borrowers arrange to pay off a proportion of their debt over a set period of time – leapt by 20.9% over the year, despite indications that creditors have become less willing to sign up to them.

Ivan Cooper, Chairman at debt advice experts Chiltern, said: “The number of IVAs has risen by over 20% in the past year, despite indications that creditors are less willing to agree to them, which suggests that many more people are suffering with their debt management problems.

“In all cases, we would recommend seeking impartial advice from a reputable organisation, like Chiltern, as expert debt help can usually prevent problems from worsening and can often help to avoid bankruptcy.”

Overview on types of insolvency

Bankruptcy: is the traditional way of escaping overwhelming debts, but carries social stigma and may affect you for a long time after completion. Bankruptcy usually ends after one year, but you are most likely to lose all of your assets (including your house and car) to pay something towards the people you owe to.

Individual Voluntary Arrangements (IVAs): A deal between you and your creditors, requiring debt and IVA advice from a qualified insolvency practitioner. With an IVA there is less stigma, and less chance of losing your home. IVAs involve paying some of your debts over a fixed period of time – usually within five years – after which time all remaining unsecured debts are written off.

Debt Relief Orders: Introduced in April 2009, these allow consumers with debts of less than £15,000 and minimal assets or surplus income to write off debts without a full-blown bankruptcy. The criteria for these is quite strict and they are aimed at people with a disposable income below £50 per month, and where the person owing money has no assets over £300 (or a motor car of less than £1,000).

Other, ways to repay debts include informal Debt Management Plans (DMPs), which can help to avoid bankruptcy whilst still repaying debts (but at a more affordable rate) amongst others.

A clampdown on self-certification mortgages will commence at the end of this week, after the sector’s last provider claimed it was withdrawing from the market, following a report on the poor debt management of many self-cert mortgage holders.

Platform, a division of the Co-operative Bank, announced that they would be taking their self-certification mortgages off the market two weeks after the Financial Services Authority (FSA) issued a report proposing a ban on future self-cert home loans.

These home loans (also known as “liar loans”) were popular amongst the self-employed and freelance workers whose income was irregular, as they enable borrowers to verify their own income without evidence of income or overall salary.

However, some companies and brokers allowed borrowers to inflate their incomes and take out larger home loans. Following the economic downturn, many of these people are now in difficulty struggling with mounting debt problems, and their mortgages cannot be maintained.

In the report by the FSA, they found that there was widespread evidence of fraud and a higher than expected number of borrowers in arrears among those with the controversial loans. As a result they have proposed that all future mortgage applications require lenders to verify income.

David Tweedy, Managing Director at Platform, said: “The FSA mortgage market review paper has shown that continuing to offer self-certification mortgages in its current format is unfeasible, and, after careful deliberation of the paper, Platform has now taken the decision to withdraw from the self-certification market.”

Ivan Cooper, Chairman at debt advice specialists Chiltern, said: “The end of self-cert home loans will hopefully restore sensible lending practices, as people will have to prove that a mortgage is affordable before it is granted.

“Those experiencing debt management problems at the minute would do well to speak to an expert for some impartial debt advice.”

Existing self-certification mortgage holders won’t be affected by lender’s decisions to withdraw their accounts and they should continue to run as normal.

Whilst many debt management companies strive for high standards of transparency and fairness, recent findings from the OFT and Ministry of Justice have found that there are still some out there who are less than adequate.

The OFT has launched a round of compulsory audits on the debt management industry today. One type of debt management company which has caused significant problems are so called ‘Claims Management Companies’, they charge huge fees for a promise of wiping out debt using legislation. Their advertising is heavily regulated, in that they cannot offer guaranteed results or make unrealistic claims, however, until recently, the OFT had not taken significant action.

Over the past few months the Ministry of Justice has closed 100 of these rogues and announced that another 500 are under scrutiny. Now the OFT has decided that it needs to get involved and will publish their findings in 2010.

The OFT has taken 24 formal actions since April 2008, warnings include cold-calling, websites that imitate government sites and mail shots. The review aims to look closely at the practices of debt management firms as the market has evolved significantly since the last review in 2003. Whist some companies, like Chiltern, have been around since the mid 1990′s there have been a large number of new firms starting up in the last 3 years whose experience is not always adequate.

There has also been a massive growth in online advertising; many companies have ploughed large amounts of money into websites and advertising that is very difficult to police. The credit crunch has only fuelled the fire of rogues entering the market and making spurious claims. As part of the review, there will be on online forum where people can discuss and complain about issues and specific companies.

The review will include a sweep of online debt management advertising, an online forum for consumers wishing to complain about a licensee and a questionnaire to licensees involved in debt management.

Ray Watson, OFT director of consumer credit, said: “A recent increase in formal OFT enforcement action, rising complaints and new problems emerging in the market suggest that some businesses are still not meeting minimum standards. This review will help us identify those practices that are harming consumers, as well as the reasons for non-compliance, and will help us target our enforcement action.”

Ivan Cooper, Chairman at Chiltern Debt Management said: “We are very supportive of this review, we believe that it can only be good for the industry. We believe that compulsory regulation through bodies like DEMSA is the way forward, and hope that the government will seriously consider it for the future.”

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As interest rates start to rise again from their historic lows, the debt management problems of many Scottish homeowners could soar fuelling higher repossession numbers.

According to housing charity, Shelter Scotland, many households in Scotland will be unable to keep hold of their properties once interest rates rise as costs continue to increase.

Sheriff Court figures show that more people are facing the loss of their home in Scotland. The statistics show a 20 per cent increase in mortgage actions taken to court in 2008-09, with a rise of 50 per cent in decrees granted.

Graeme Brown, Director at the charity, said: “Radical action is needed at a time when more families than ever are losing their homes. Without that repossessions are set to soar.

“Unless we get a better balance in the housing market we are already sowing the seeds of the next boom and bust cycle.”

Ivan Cooper, Chairman at debt advice specialists Chiltern, said: “People have been struggling despite the interest rates being at a historical low.

“Seeking impartial advice from a reputable provider, like Chiltern, can help eviction be avoided in many cases – as often there are underlying issues with the debt management of unsecured balances.”