The level of personal debt in this country will become a huge political issue over the next few years. In the end, individuals have to take responsibility for their own actions. Everyone knows what their income is and what level of debt they can service and they should act accordingly. But the Government has made it so easy to go bankrupt it has taken away bankruptcy’s social stigma. Amazingly, thanks to Labour’s 2003 Insolvency Act you can now emerge from bankruptcy after a mere nine months. Unsurprisingly, the number of annual bankruptcies has now exceeded 100,000 for the first time ever. Just think what the number will rocket to when there’s a recession.
Bankruptcy should never be seen as'the easy way out'. There are even stories of students of are encouraged to go bankrupt as the best way of avoiding paying back loans - they then go travelling the world for a year and by the time they return they are out of bankruptcy.
Bankruptcy leaves a trail of destruction among the debtors. I know few people will have any sympathy for credit card companies or banks who are left being owed thousands, but there are many small companies and individuals who are affected. Bankruptcy should always be a last resort, not a first.
broon brought this law in to encourage entrepreneurship amongst small business men a nd the self employed.
ReplyDeleteBizzarrely the only group where bankruptcies haven't risen-you guessed it,the selfemployed and small businessmen.
Iain,you omit to mention the rise of IVA's which are also at record levels.
Without necessarily disagreeing with your underlying thesis, this is not true:
ReplyDelete"Everyone knows what their income is and what level of debt they can service"
The Tories under Thatcher created the greed culture and every person for themselves. Labor encourages it. Businesses screw the system as much as they can without any social responsibility so why are you surprised when some people spot an opportunity and screw businesses back. Who cares if a few small businesses suffer or a Goldman Sachs trader gets 1p off his £50m bonus it's all just part of the grab what you can get away with market forces mantra.
ReplyDeleteAgreed Iain, the big problem is professional bankruptees
ReplyDeleteIain,
ReplyDeleteThe cultural reasons behind the increase in younger people going bankrupt are obvious. In many parts of the country they have no real hope of ever affording to own property, and this combined with easy to obtain credit and intensive lifestyle marketing means that not being in debt is unthinkable.
Without going a bit too 'Daily Mail' on you, I teach at a primary school in a rough area, where children of parents who exist on benefit come to school with mobile phones bought with shop credit. The idea that you can have anything you want and have it now is deeply ingrained in our society. I thought that the Conservative 'inner tosser' viral was a good idea (I overheard a couple of the children talking about it) but I suppose bringing down consumer borrowing is not at the top of any politicians wish list, as it keeps the economy going.
Iain I agree with you.There is one point that you miss though.The Bill is picked up by the likes of you or I in other words the honest and hard working.
ReplyDeleteThe Banks and Building Soceties done take the hit, You Do.
I treat people who brag about using the system in this way the way I used to treat people who failed to pay their Rates.. With disdain. I also call them crooks!!
Qaqwex what utter bollocks: "The Tories under Thatcher created the greed culture and every person for themselves." Its called human nature. It was the same before 1979.
ReplyDeleteAnd businesses don't "screw the system". Who do you think pays for all the social services, hospitals and so on with corporate taxes? I know that Crazy Dave Camera-on likes to bash business but please refrain from such Bennite balls in future. Its enough having to suffer Dave's opinions.
Meanwhile in the real world non-payment and defaulting creditors are a real problem for small businesses.
The Enterprise Act which introduced the shorter period was inspired by a Mandelson trip to Florida, where he visited Disneyworld which says it all really.
ReplyDeleteIn Scotland similar reforms have just been enacted, and I posted about them on my blog at the time http://loveandgarbage.livejournal.com/63992.html inspired by your earlier posting on bankruptcy. WHile the bankruptcy reforms have been promoted as being pro-entrepreneurship as rigger mortice notes above the very people that aren't using them are the small businessmen. Instead they are being used by those suffering from consumer indebtedness. It is this problem that should be targeted - and the easy provision of credit. I - like most - have a credit card. My credit limit is continually raised (without my express agreement), I receive regular promotional literature offering me new loans and new cards. The difficulty with increasing regulation in these areas though is tampering with the market and the risk of "nanny knows best". I'd be interested to know what you think about increased regulation of consumer credit, and whether increased regulation can be reconciled with Conservative politics?
Iain, sloppy.
ReplyDeleteStudent loans are not covered by bankrupcy. Thus even if a student goes bankrupt they are still liable for those debts.
Otherwise they would all do it.
"Bankruptcy Should Never be the Easy Way Out"
ReplyDeleteA New Year message for the Conservatives or Labour or both?
What a dilemna. Declare the (ahem) loans 'gifts' as honest gifts and go to gaol for pretending that they were loans, or stick to the loan myth and leave your creditors in the lurch while you go under.
"Just think what the number will rocket to when there’s a recession."
ReplyDeleteSo true, the ease of bankruptcy and the subsequent reaction by the finance industry could easily prolong the pain.
Iain, your diary is becoming insipid, weak and boring. Sort it out old chap.
ReplyDeleteA law designed to encourage entepreneurship seems like a good thing to me, I'm not sure that it's the governments bankruptcy laws that have caused the increase.
ReplyDeleteSurely the blame lies in the explosion of consumer credit, many people asipre to own certain posessions and status symbols. Easily available credit makes it possible. Few people really think about the full extent of the consequences, when they take out credit, often an unforseen event can lead to people unable to meet their obligations.
It was said, by some, that the new provisions would help to remove the "stigma" of bankruptcy. But bankruptcy should carry a stigma. A man who has failed to pay his debts is a man who has broken his word, and is not to be trusted.
ReplyDeleteWe shall all pay for this surge in insolvency, in higher interest rates and bank charges.
To broaden the discussion, if I may: can anybody think of a single law passed by this government since 1997 which we could not cheerfully repeal tomorrow?
One of the cooking Two Fat Ladies - the one who's still alive - has been bankrupt three times and she doesn't seem to think it was her fault or that she had done anything immoral. "Circumstances", it seems, were against her.
ReplyDeleteTotally agree Druid, Qaquex comes across as a sad loser with a huge chip on his/her shoulder.
ReplyDeleteHuman nature combined with the "I'm all Jack" attitude that prevails nowadays, it's hardly surprising that personal bankruptcy levels are soaring.
It's heartbreaking to hear that young peopleare deliberatly going into bakruptcy instead of paying off student loans. (Why bother going to University in the first place - I alluded to this here)
Iain is, of course, right. Bankruptcy ought to be the last resort, not the first.
"There are even stories of students of are encouraged to go bankrupt as the best way of avoiding paying back loans - they then go travelling the world for a year and by the time they return they are out of bankruptcy."
ReplyDeleteThat loop hole was closed a couple of years ago. If you go bankrupt you still have to pay back your student loan.
Hang on, Iain - you can "emerge" from bankruptcy but your credit rating is never the same. It is not an easy option.
ReplyDeleteDo you really think the majority of bankruptcy candidates are pulling a scam? Bancruptcy is not and never has been a way of scoring off your creditors. If you have anything of value you will lose it and you will be presented with the fallout of your ruin for years.
ReplyDeleteYes, it is true that some have been lulled into an unsustainable level of personal borrowing. But to assign "greed" as the causal factor in indebtedness (as some have done) is to merely show ignorance.
We have no idea what is around the corner in our lives. One may go from comfortable to very hard up in deed in the space of a year. Illness, disability and discrimination in the workplace can mean long term unemployment - how does that square with your assertion that:
"Everyone knows what their income is and what level of debt they can service "?
Do you deem yourself to be omniscient?
You do not know if you or your partner or your loved ones will be alive tomorrow, or that your current prosperity will fade. It will not then be greed that sends you out with your credit card, it will be necessity.
What is happening now is that the current housing boom is being financed on the back of credit cards. People are stretching themselves to acquire mortgages and skimping on other thingks. As costs of fuel and taxes eat into the monthly budget, people will inevitably use a credit card to finance holidays, then clothes, and then food. This cycle is has already reached its apogee and within the next two years you will see the inevitable slide into recession as the level of home reposessions increases.
I too believe that one should take responsibility for one's own actions, but the level of personal indebtedness is due in part to the tacit approval of successive governments of increased personal credit and the ease with which it is acquired.
There's nothing wrong with bankrupcy, look at Jonathan Aitken, his lifestyle improved when he became one! I might consider it, aaaah what a fine example to us all, that man is!
ReplyDeleteCitizen Andreas said: "A law designed to encourage entepreneurship seems like a good thing to me,".
ReplyDeleteI don't agree. The government should keep its paws out of the private sector because it doesn't understand it. Its role is passive. In other words, no laws designed to inhibit entrepreneurship will suffice.
And yes, bankruptcy should carry a stigma.
Trumpeter Lanfried: Yes. I have said before that the first thing a Conservative government should do, before setting about any other business, is repeal every single destructive, harmful and moronic law passed by these Labour morons who have no political sophistication, no knowledge of the past (has any of them ever read a biography of a former prime minister or a president of the US, for example?) who are nothing but petty,jumped up town councillors.
I sincerely wish every one of them great ill-fortune.
Quite Jeremy. This could be very serious. I know of one former law student with 80k of debts and growing. Most of it student loans for various courses. Having qualified as a barrister he is stacking shelves in a local DIY shop because he could not get a pupillage. Bankrupcy would hardly enhance his prospects in the law. But the interest keeps mounting. This is sadly not an unusual case.
ReplyDeleteAs individuals we owe over one trillion pounds. As Etzel points out all this debt will act as a drag anchor on the economy prolonging and deepening any recession that will occur. Our economy could end up in the doldrums like Japanese one. A grim prospect.
Labour likes to pretend that it has abolished the economic cycle, but of course it hasn't. No more boom and bust they said. We have had the easy money boom; no comes the bust. And with it will go nu Labour's gold plated reputation for economic competence.
As for the "circumstances" excuse. That's a new variation on the drunk's "it was the drink talking your honour"!
Iain, I very much disagree.
ReplyDeleteBankruptcy is not an easy option, and credit is hard to get afterwards.
Secondly you fail to appreciate that if you go bankrupt twice, in quite a long period of time, you go down for 15 years. The same applies if the Official Receiver decides the bankruptcy was YOUR fault. (Though I know no case where they have).
You also seem to deny banks as having any responsibility in this at all. In quite a lot of circumstances they lend people money on credit cards, then keep upping their limits because they know they will spend the money.
A few corrections also,
It was the Enterprise Act 2002 which amended certain parts of the 1986 Insolvency Act, Student loans from the Student Loan company are NOT provable in bankruptcy, IE you do not get out of paying them no matter how many times you go bankrupt.
That loop hole was closed a couple of years ago.
ReplyDeleteI wish I had known about it before. The interest charges on my Student Loan are so high that my payments down really bring the total owed down much each year!
I always thought Broadstairs was the 'last resort'!
ReplyDeleteCan someone explain how someone in the process of an IVA can put an offer in on a #170,000 house? That was what the potential buyers of my house had done. How on earth is this right?
ReplyDeleteIain - you're wrong on Student Loans, yet hang a large part of the credibility of your story off spurious anecdotes about travelling students defaulting on their student loan debt. The least you can do is sort out your article to make it a bit more credible.
ReplyDeleteEasy bankruptcy is good for an economy - it encourages risk taking and entrepreneurialisms. Punishing people for their debt should not be the role of the state; neither should the state see it as its role to punish the feckless. Banks and other lenders - the market - are perfectly capable of pricing in the risk of bankruptcy when making a loan and assessing the sort of people likely to default (its what credit scoring is all about).
And while you're at it please make a new year's resolution to avoid writing spurious "why oh why?" pieces on your blog when they don't stand up to any sort of reasonable scrutiny.
Is this posting on the blog a coded attack on Osama Bin-Cameron, Lido of the Conswevative Partei, and his 'Tosser Within' tendency?
ReplyDeleteThis is by no means all of it, Iain. Many are not aware of the bank charges in real terms, they're induced night and day to spend, the emporia spread like octopii across the land and young people are drawn into the buy now, pay sometime in never never land. There's a whole world out there who are not fiscally responsible because the notion has never been introduced to them.
ReplyDeleteThis thread carries a certain flavour of conservative deterministic moralizing that even one of a conservative bent such as I am find distasteful. The equivalence of insolvency with moral turpitude [insolvent a wrong ‘un, broken his word] surely belongs to a past era of Christian social Darwinism best left behind.
ReplyDeleteMost people [see the studies, instead of relying on anecdotes] go bankrupt not because they have blown their credit on holidays or mobile phones, but because of sudden changes in life circumstances—loss of job, huge medical bills, etc. Going thru 9 months of insolvency plus demerits on credit score thereafter surely not piece of cake and not the first resort for most people.
Enough of this Daily Mail scare-mongering Iain, unless we are serious about bringing back debtors’ prison. There is of course stigma in bankruptcy. The ultimate goal is to provide a fresh start for all concerned—definitive writing off of non-performing debt for lenders, clearing balance sheets of borrowers, and for those “blessed” amongst us chagrined at paying “higher” rates on account of the “damned” bankrupts, it is the cost of participating in the nation’s credit system, which, BTW, is not compulsory.
America, with 5 times the population of Britain, has fifteen times the bankruptcy rates of England and Wales. Considering how more dynamic the US economy is, dare I say that UK could use an even more flexible bankruptcy regime?
Sorry, I disagree with you here.
ReplyDeleteI used to work for a bank, and their explosion in targets for lending has led to this problem. Staff have been 'incentivised' to sell these debts, or face a pay cut. Only recently has the affordability been considered. They are partly to blame for this.
I agree that whilst bankruptcy may seem an easy way out, what is the alternative. Suicide ?
Of course, people shouldn't take on loans they can't afford. But lenders have a responsibility not to farm out debt if they aren't sure it will be repaid. Oh, the banks will say it is not in their interest to lend to people who will default. This is disingenuous.
They have a vested interest in taking a calculated risk in having some bad debts, as the only way they could eliminate them altogether is make the lending criteria considerably more stringent. And anything which affects their profits just ain't gonna happen, folks...
Here's a funny thing. In its last phase imprisonment for debt, even for a very short period, discharged the debt. When it was finally abolished (I think in the 1860s, or a little later) a number of debtors turned up at the King's Bench prison, asking to be taken in, so that after a few days' inconvenience they would be debt-free. And I think they were taken in. The wheeze worked.
ReplyDeleteSlightly surprised by your approach here, Iain. I thought you would have approved of the 'American Way' where bankruptcy is easier and has far less stigma ?
ReplyDeleteI see some coments refer to the Enterprise ACt model as being based on the American fresh start approach. Ironic then that at the time Westminster passes the Enterprise Act and Holyrood passes the Bankruptcy and Diligence etc (Scotland) Act, the US stepped back from the regime with the 2005 Bankruptcy Prevention and Consumer Protection Act - which introduces compulsory financial education as a key element to the bankrupt's discharge and makes other changes. The legislation was introduced as a response to concerns that bankruptcy was being used as a soft option.
ReplyDeletebenedict white suggests that going bankrupt twice will lead to a 15 year restriction. Not necessarily. The Enterprise Act introduced Bankruptcy restriction orders which may be granted for periods from 2 to 15 years and may make the obtaining of credit difficult. The 15 year period will only be granted where there is extreme behaviour by the bankrupt. There is no automatic 15 year restriction. The BROs were introduced expressly to dissuade the easy option - but appear to target unco-operative debtors; and unlike the US reforms (or the law in other commonwealth systems) have no compulsory financial education regime.
The student loan point made by Iain was wrong as a statement of current law in England - and the loophole that did exist for a time was never intended as the Education (Student LOans) Act 1990 expressly provided that student loans were not to be debts for bankruptcy purposes. The problem that arose came through over-complex amendment to legislation (a Westminster tendency) and has still not been remedied in Scotland where the legislative reform has still not come into force.
HM Stanley refers to reliance on empirical data rather than anecdote. Would this be a reference to the work of Kempson and Ramsay. Recent work by Professor Iain Ramsay (a Canadian who looked at English bankruptcy law) drew on Elaine Kempson's DTI funded research indicating that the rising bankruptcy rates ran alongside a vast increase in unsecured consumber indebtedness - where the indebtedness when accompanied by job loss pushed the debtor over the edge. Kempson's study does identify job loss particularly as a key problem. However, Kempson also notes the increased marketing, automatic credit increases, low interest introductory offers, and other "American practices" as increasing consumer indebtedness - meaning that people are over-extended if job-loss occurs.
Couldn't agree more Iain and its not just the way they undermine morality:
ReplyDeleteeasy bankruptcy laws also destabilise the economy, they encourage "one-way bets" during bubbles that then make the economic cycle much more severe - booms are higher, busts much worse. In the end the busts beggar the banking system and (because of that) mean the cautious saver ends up paying for other peoples' risks. (Either through inflation or banking collapses).
"It was the drink your honour"
ReplyDeletesounds too much like that Australian Neo-Nazi Mel Gibson.
A fine epithet.
Scot:
ReplyDeleteI suppose you could say that recent "tightening" of US bankruptcy laws was result of "concerns that bankruptcy was being used as a soft option". A less charitable and more descriptive explanation is that the reform was really a sop by the Republican Congress to its banking supporting interests, and frankly, the deisre for that by then do-nothing Congress to go to the country with some thing, some legislation. Despite the tightening, "fresh start" is still the staring point of US bankruptcy law, with more "ability to pay" tacked on by new legislation.
Regarding studies of causes of bankruptcies, I refer to Elizabeth Warren [Harvard Law Professor and former Professor of HM Stanley] whose studies, albeit mainly in the US, point out that most bankruptcies result from job losses, divorce, sickness/disability costs.
"That loop hole was closed a couple of years ago."
ReplyDeletere student loans - I was recepient of the first student loan and bankrupcy did not clear them NOR EVER, not that I took it mind.
If banks want to avoide bankruptcies then they should sort out their collections procedures to bring them more in line with the requirements of the banking code.
ReplyDeleteThey should have a transparent and published procedure for people who end up over-indebted to re-schedule payments. The current system relies on adding penalty charges and bullying the consumer in the hope they will borrow the money from another institution, friends or family.
If banks were sympathetic to the over-indebtedness they help create maybe less of their customers would gop bankrupt.
Have to say Iain, thats awfully judgemental of you.
ReplyDeleteOf course what you say is true in some circumstances but lets be honest, most of us would literally rather die than have a bunch of strangers pulling our lives to pieces.
Easy way out? Really?
As for the level of debt, I tend to agree that people should take personal responsibility for what they can afford to repay. However, they can't always tell what the future brings and the payment protection schemes offered by most UK financial institutions are a con.
If the tories hope to live up to expectations at the next general election, then this kind of simplistic analysis must end!
C'mon Iain, we hate Labour, give us something to vote for!
HM Stanley - "Huge medical bills"? In Britain? Wha'?
ReplyDeleteThe UK economy, of which Brown likes to boast for it's record years of growth, is in fact one huge ponzi scheme built on debt.
ReplyDeleteThe massive house price bubble combined with lax lending has enabled many people to use their homes as cash machines to go on an orgy of consumer spending (largely on imported goods) through the use of mortgage equity withdrawal along with the liberal use of credit cards.
This credit/debt fuelled consumer boom has left record and growing debts of over £1.26 trillion and a huge and expanding trade deficit. The Government, of course, has also been profligate with it's spending and the public accounts are now in the red to a record extent.
2007 seems likely to be the year that the bubble bursts leading to unemployment, house repossessions, bankruptcies and all the associated social problems perhaps even on a scale not seen since the thirties.
When the Tories are inevitably voted back into power they will be expected to sort out the almighty mess left by Blair and, most particularly, by Brown.
It will not be an easy task.
Iain! No! Bankruptcy is great! It saved my sorry little butt 9 years ago! I learned my lesson! Now I pay my credit card off IN FULL every month!
ReplyDeleteBankruptcy leaves a trail of destruction among the debtors.
ReplyDeleteDouble-entry book-keeping suggests you mean Creditors
No doubt all small business owners have had this...but anyway.
ReplyDeleteRecently my other half lost several thousand when a client declared itself bankrupt. Strangely though, the original owner of the bankrupt company is wanting her to do some more work for a new company that has acquired all the assets of the old one. And of course it still has access to the work she originally carried out, even though she was never paid in full for it.
I'm not sure I like this ability to dissolve companies and start them up again, leaving a trail of unpaid creditors, but allowing the owners to continue as if nothing had happened. It might encourage enterprise but it also encourages irresponsibility.
For the record, the owner is reasonably high profile industrialist with a somewhat chequered history (and party connections, I understand)
I like this ability to dissolve companies and start them up again, leaving a trail of unpaid creditors, but allowing the owners to continue as if nothing had happened
ReplyDeleteMy irritation has been the attempt of the owner to use the name and livery of the company in administration whilst trading as a newly-registered company as if nothing has happened.
Striking off of directors is obviously a neglected approach