Paul's New Year predictions

Increase in insolvencies forecast for 2011

As we say goodbye to 2010 and look forward to the start of 2011, I thought that I would give my predictions for 2011 from an insolvency point of view.

Overall, 2010 was a surprising year insofar as the overall numbers of people and companies getting into serious difficulties started to edge downwards, rather than continuing to skyrocket upwards as many had expected. My view is that there are different factors at work in relation to individuals and companies.

For the 'over-indebted consumer' there are a huge number of 'debt management companies' being set up and they are marketing themselves in increasingly effective ways to people with debt problems. There are good and bad firms amongst these organisations and the quality of the advice on offer varies wildly from one firm to another. Most of the solutions offered by these businesses are 'informal' arrangements - ie they aren't legally binding arrangements under the Insolvency Act 1986. This means that they are only lightly regulated and they don't show up on the official statistics, hence they hide the full extent of the nation's personal debt problem.

In relation to companies, whilst the headline figure of liquidations is on a downward trajectory, my view is that the numbers are artificially low because of a number of factors that are keeping terminally ill businesses going for longer than may have been the case in the aftermath of previous recessions. Firstly, interest rates are at historically low levels, aiding struggling businesses by keeping interest payments low. This, of course, cannot last and as interest rates inevitably increase, so will the number of businesses going to the wall.

Secondly, banks are in no rush to pull the rug out from under struggling businesses, as they are aware that much of their security is over valued and they will be unlikely to recover all their debts from a fire-sale. So, as long as a business can service the debt (ie pay the interest) the banks are unlikely to demand repayment and end up testing whether their security really is worth as much as the debt.

Thirdly, HM Revenue and Customs have been uncharacteristically lenient towards businesses that are struggling to pay their tax debts and a huge number of 'Time to Pay' agreements have been made, allowing companies more time to pay off any arrears. But this will not, and cannot, last for ever and there are signs that HMRC are becoming more forceful in their treatment of debtor businesses.

So, my rather gloomy prediction for the year ahead is a sharp increase in failures amongst small to medium sized companies as interest rates edge upwards and the banks and HMRC take a more robust approach to defaulting businesses. Also, bankruptcies and Debt Relief Orders will increase as further job losses occur as a result of public sector cuts. How high will these numbers go? I'm afraid that I'm not going to stick my neck out and put a definite figure on it, but I will watch with interest the official figures for the next 12 months.

But, as always, my message is a positive one: the situation is never as bleak as it may seem and by taking advice as soon as possible, there are things that can be done to rescue a business and avoid bankruptcy. If you would like to discuss the options for either yourself, or for a client, just give me a call on 01709 331300.

Plans to widen debt relief scheme

DRO eligibility to be amended

The Government today announced plans to make more people eligible for a debt relief scheme that allows individuals to write off unaffordable debt. The Debt Relief Order (DRO) was introduced in April 2009 and has been dubbed 'bankruptcy lite' - debts are written off in the same way as in bankruptcy, but the DRO is designed for people with very low value assets and little spare income after living expenses, where the full rigour of bankruptcy is unnecessarily cumbersome. Effectively, it is a way for over-indebted consumers to remove the burden of crippling debt that can never realistically be repaid. The idea is to draw a distinction between cases where debt is disputed or where the debtor may be able to repay but chooses not to, and cases where the debt is not in any doubt and nor is the fact that the debtor will never be able to repay it.

The main criteria for a DRO is debts of less than £15,000, surplus income after reasonable living expenses of less than £50 per month and total assets worth less than £300 (not including a car which may be worth up to £1,000). This makes a DRO available to a slender but statistically significant group of over-indebted individuals.

The plans unveiled today are to exempt pension plans from the asset cap. Previously, having a pension would mean that a debtor would fail the low asset requirement (assuming that the pension fund is worth more than £300.) As almost all pension policies are 'locked away' for use in retirement and aren't available for paying debts, it seems fair to exempt pensions from the equation. In addition, the Government is firmly entrenched in a policy of encouraging everyone to save for their retirement. It therefore makes sense to amend the criteria in a way which will have little effect on the likelihood of creditors recovering their debts.

Small businesses at risk in public sector cuts

150,000 small firms at risk if their public sector contracts cease

Research published today by R3, the insolvency trade body, reveal that one in ten or 150,000 businesses in the UK face insolvency if the work they carry out for the public sector is cut as a result of cuts in public sector spending.

The reduction of the UK's structural deficit is an important objective for the Government and a wide ranging review of public sector spending is underway with the aim of making significant savings for the public purse.

The findings show that huge numbers of businesses are at risk if their contracts come to an end and small businesses are particularly vulnerable as many will find it difficult to replace the business which is lost.

It is a sobering thought that around 26,000 firms are forecast to go bust during 2010, according to the current failure rate. If just some of those 150,000 businesses at risk find that they are unable to continue, it looks like 2011 will be a record breaking year for company insolvencies, for all the wrong reasons.

The good news is that businesses can work with their creditors to reach an arrangement to deal with unpaid bills if the worst happens and major contracts are lost. This mechanism will buy a company time to rebuild its customer base and return to profitability, safe in the knowledge that creditors won't be threatening to wind up the business.

If you want to know more about how this could work for your business, call me today on 01709 331300 for a free, no-obligation chat.

Good news for homeowners - but will it last?

Repossessions fall - but is this the calm before the storm?

The Council of Mortgage Lenders (CML) today announced a decline in the number of housed repossessed by mortgage lenders in the second quarter of 2010. In the three months to the end of June, there were 9.400 repossessions, down from 9,800 in the previous quarter and considerably below the same quarter last year, when 11,800 properties were taken back by first charge mortgage lenders.

As a result, the CML have revised down their forecasts for repossessions in 2010 as a whole from 53,000 to 39,000, a reduction of around 25%.

The number of mortgages in arrears has also reduced, with 178,200 mortgages in arrears equivalent to 2.5% or more of the mortgage balance. This is 5% lower than at the end of March and a whopping 17% lower than the same period last year.

These figures have surprised many in the industry, with mortgage difficulties being contained below the levels that the CML expected at the start of the year, and in comparison to the recession at the start of the 1990s.

I don’t want to be accused of talking down this good news. But I’m afraid that this is just a lull, an aberration, before things get worse. There are some important factors that make this downturn different to the 1990s recession. Firstly, the headline interest rate is at an historic low: at some stage, rates will start to increase and many homeowners who are currently struggling to keep their heads above water will sink beneath the waves. Secondly, the Government is struggling to cope with crippling levels of debt and has indicated that wide-ranging cuts in public spending will be used to help balance the books. Nobody knows for certain what the effects of those cuts will be, but rising unemployment and increased job insecurity will surely become a reality for many more homeowners in the months and years to come.

If you have financial problems and are worried about how this will affect your home, call me today on 01709 331300 for a free, no-obligation and confidential chat.

More people than ever are becoming insolvent

Insolvency statistics give cause for concern

Official figures released by the Government’s Insolvency Service today show a 5% increase in the number of people getting into serious financial difficulties in the last three months. Although the number of bankruptcies has dropped by nearly 20% in the past year, the overall number of people becoming insolvent has increased as greater use is made of alternative ways of tackling high debt levels.

It seems clear that many people are struggling to cope with the effects of the downturn and record numbers are becoming insolvent. Job losses and cuts in overtime payments are making life difficult for households. This means that debt that was previously affordable can become a real problem. And as public sector spending cuts start to kick in, the situation is likely to get even worse.

In the first six months of 2010, over 70,000 people have become insolvent – the equivalent of a town the size of Barnsley or Chesterfield.

The cost of becoming bankrupt has increased in recent months and this may have encouraged people to look at alternatives. In particular, the new Debt Relief Order has become more popular since it was introduced last year. The good news is that there is help available – but I would recommend that anyone in difficulties should take advice from a reputable organisation. Beware of unsolicited calls offering advice that sounds too good to be true.

To find out what all your options are, call me today on 01709 331300.

Getting away from it all can lead to problems back home

Millions get into debt for a holiday

The insolvency trade body R3 released figures today showing that over 2 million holidaymakers have got into debt to pay for holidays this year and will spend an average of seven months paying it back.

The research, carried out in the middle of July by pollsters GfK NOP reveals that 2,329,500 people had to borrow on average £1,130 to pay for a summer getaway.

Now I like a holiday as much as the next insolvency practitioner and to many, a spend of just over £1,000 on a big holiday may not be too shocking. In fact, I wonder if the ‘real’ figure for holiday spending is much more, but the individuals surveyed didn’t have an accurate idea of exactly how much they would spend: the flights and hotel may be around £1,000 but how much more unplanned spending goes on food and booze, sightseeing trips and souvenirs?

In my experience, the problem often tends to be that the holiday spending comes on top of other unsecured debts that have mounted up through the year. This kind of spending can be the final straw for many people, who return home to credit card bills and loan repayments that they simply can’t afford.

The good news is, no matter how debts have been incurred, there is help available. If you’ve returned from your summer holidays and found that you’ve got more than a few photos and a bottle of the local firewater to remind you of your trip, give me or one of my colleagues a call on 01709 331300. We can help.

More help for troubled companies?

Government consults over 'restructuring moratorium'

The Government has announced proposals for a restructuring moratorium to protect companies whilst a rescue plan is put in place to help save businesses and preserve jobs.  A moratorium is basically a protected ‘breathing space’ during which no action can be taken against the company by its creditors. The moratorium is aimed at companies where the underlying business is fundamentally viable but because of the prospect of future insolvency or financial distress there is a need to protect the business from creditors whilst some restructuring is carried out. The moratorium is proposed for use alongside the existing Company Voluntary Arrangement or Scheme of Arrangement procedures.

The proposals provide for a moratorium which would last for three months, which would commence following a court hearing at which creditors could be represented. The company would continue to operate under the existing management and directors however they would be bound by a set of obligations and potential sanctions for misuse of the procedure. A licensed insolvency practitioner would be involved at key stages to help safeguard the interests of creditors and other stakeholders.

I welcome this consultation as I have been an advocate of this type of moratorium for many years. The CVA procedure is often frustrated by the lack of any effective moratorium – although a moratorium is technically available to qualifying companies that are proposing a CVA, the requirements are widely considered to be so onerous that they are seldom used by IPs. This is in stark contrast to the Interim Order that is available for debtors who are proposing Individual Voluntary Arrangements (IVAs) where rapid and straightforward protection is available to allow a breathing space whilst an IVA isformulated and put forward to creditors.

The consultation ends in the middle of October so I eagerly await the Government’s response. This could be a timely measure which could have a real impact in terms of saving businesses and jobs.

'Corporate undertakers' become 'company doctors'

Research shows that the insolvency profession is good for the economy

It's great to have some good news about the economy and about the insolvency profession. Research carried out by ComRes, a leading polling and research agency, shows that the UK’s insolvency industry helped to save nearly two million jobs in companies going through insolvency and rescued around six thousand (5,851) businesses last year. In addition, the UK’s Insolvency Practitioners who work on corporate insolvencies spend nearly a quarter of their time on preventing insolvencies rather than dealing with companies that have already gone to the wall.

Hopefully this will go some way towards changing people's opinions of what insolvency practitioners like me actually do. Before I joined the profession, my own experience of dealing with an insolvency practitioner had not been entirely positive. I often think back to that time and as a result I am determined to be the type of practitioner who is focussed on delivering the right advice at the right time, concentrating on preserving businesses and jobs, rescuing companies and keeping people out of bankruptcy where possible and practical.

My goal is to give balanced, impartial advice on all the options, to allow people to make their own informed decision. Business owners know far more about their business than I ever will, so my job is to offer the various tools in my insolvency 'toolbox' and help them understand how they can help deal with debt and insolvency problems in their individual circumstances.

But I can't work miracles. I can't turn back the clock and I can't wave a magic wand. The sooner that I am asked to help, the more options there will be and the more chance we will have in turning things around.

So if you've been worrying about debt but you've been concerned about asking advice from a 'corporate undertaker', why not call me, Dr Debt, the company doctor. My number is 01709 331300 and it costs nothing to have a chat about your options.

Ostrich mentality to debt is still a big problem

Sticking your head in the sand will not help deal with debt problems

Research published today shows that many people are too ashamed to ask for help with their debt problems, preferring to ignore them in the hope that they will go away. A poll carried out for 'R3', the insolvency profession's leading association (of which I am a member) shows that 21% of people with debt problems haven't contacted anyone for help because "It's easier not thinking about it" whilst 14% are worried what people will think if they seek help about their debts. In addition, 30% of people with money problems haven't even told their partner or family about their situation.

Unfortunately I see this situation all the time. People come to me when the situation is really desperate, where someone has put off taking advice sooner because they were worried about what people would think or what their partner or family might say. (Sometimes people are even worried about what I would think - trust me, I've seen it all, nothing shocks me any more!)

The old saying 'better late than never' is true and there are things that can be done to ease the situation even when things seem bleak. But the sooner that someone takes advice about debt problems, there will be more options and the options themselves will be more palatable and more attractive to creditors.

So if you are worried about your debts, whether they are business or personal, why not give me a call on 01709 331300. You can meet with me free of charge and I'll help you to find out what all your options are. It's confidential and I promise that I won't judge or be shocked: I'll just try to help.

Budget offers help for struggling businesses

Chancellor pledges more help for firms with unaffordable tax bills

In his Budget speech, the Chancellor of the Exchequer Alistair Darling announced that the Business Payment Support Scheme will be extended for the life of the next Parliament.

Under the scheme, HM Revenue and Customs will agree to requests from businesses to defer unaffordable tax payments in an attempt to safeguard jobs and prevent the damaging effects of high numbers of insolvencies. Since the scheme was introduced in November 2008, over £5bn in unpaid taxes has been re-negotiated by 160,000 businesses employing more than 1.4 million people.

There had been speculation that the scheme would be abolished during 2010 as the Treasury tried to maximise tax revenue as part of the Government’s efforts to cope with the record levels of public borrowing. However, the scheme has been popular and is considered to have been instrumental in saving many businesses and jobs.

However, in a separate announcement the Government has announced that from 1 April 2010 any requests for time to pay agreements for tax debts in excess of £1m will need to be accompanied by an independent business review to demonstrate the long term viability of the business. HMRC estimates that this will affect approximately 1 in every thousand requests.

This announcement will affect few firms but I’ve seen that even small firms are being increasingly asked to provide accounts when requesting time to pay agreements.

If your business is facing unaffordable tax bills, call Paul Moorhead today on 01709 331300 for help and advice. We can help arrange a time to pay agreement with HMRC.

No relief for retirement savers

Government to review debt relief rules

The Department for Business, Innovation and Skills has announced that it will consult on possible changes to the rules concerning a recently-introduced mechanism that provides debt relief to the over-indebted. The Debt Relief Order (DRO) was introduced in April 2009 and is designed to write off unaffordable levels of debt for those who are unlikely to ever be able to afford to repay their debt as they have few assets and very low amounts of spare cash.

Under the rules, the DRO is only available to people who have assets worth less than £300. The rationale behind the procedure is that it provides debt relief for individuals who could never realistically afford to repay their creditors, but for whom bankruptcy is unnecessarily burdensome and expensive.

Debt advisors have raised concerns that the rules are putting the DRO out of reach of a significant proportion of debtors who, whilst having few valuable assets, do have small amounts of pension savings. Although pension funds are usually excluded from bankruptcy, the term "assets" was not clearly defined in the DRO rules and it has been suggested that this wide definition is having unintended consequences by barring many from using the procedure.

The consultation on the rules is sensible. The DRO has become popular since its creation nearly a year ago and there is clearly a need for easily accessible and affordable debt relief for those who are over-indebted and who have no prospect of ever escaping their creditors.

Neither a lender nor a borrower be?

Lending to individuals is on the up

Statistics released today by the Bank of England show that lending to individuals (rather than businesses) increased in December amid signs that the credit crunch is easing. Total net lending to individuals rose by £1.2 billion in December whilst the twelve-month growth rate remained at 0.7%. The net lending secured on dwellings increased by £1.2 billion, meaning that secured lenders are willing to increase their exposure to the UK property market. This optimism seems to be backed up by figures from the Land Registry showing that UK house prices rose by 0.1% in the month of December and went up by 2.5% overall in 2009.

Whilst net lending secured on property has been increasing over the past few months, December saw the first net increase in unsecured lending for six months, with an overall increase of £0.1 billion.

Needless to say, different people will read different things into these figures. On the one hand, evidence that lenders are freeing up credit and making it easier to borrow money may be regarded as positive signs that the credit crunch has come to an end. On the other hand, the impact of over-indebtedness has become an increasingly important socio-economic issue and the national addiction to credit seems to be here to stay.
 
If banks keep lending without real regard for their customers' ability to repay, they will surely come unstuck again. And if individuals don't take responsibility for their credit habits, they will find themselves in deep trouble. Further regulation of consumer banking may help, but more financial education for individuals is sorely needed.

Time to close the stable door?

Calls for a ban on the sale of store cards at point of sale by unqualified staff

The leading insolvency trade association, R3, has called for a ban on the promotion of store cards at the point of sale by staff who do not have financial qualifications. In other words, no more getting to the checkout only to have a store card application thrusted at you, with the promise of some sort of introductory discount. R3 has warned that this practice "contributes to the mountain of personal debt in the UK and entices vulnerable customers into debt."

A survey carried out by R3 showed that over 70% of insolvency practitioners thought that it is too easy to obtain credit and store cards and two-thirds had seen cases where shoppers had been encouraged to sign up for store cards without understanding what they were agreeing to. The association has published case studies including several where debts of over £100,000 had been accrued on cards and cases where over 30 different credit and store cards had been amassed.

The wide availability of credit with little or no checking of whether the debt is affordable for the customer has surely contributed to the huge levels of debt - and high levels of over-indebtedness - in the UK. Lenders seem to have taken the view that they are prepared to offer credit with little or no evidence of whether the debt can be repaid, in order to reduce the "cost of acquisition" of new customers. Normally, the only time that a lender is interested in affordability of a debt is when the customer has begun to struggle with the repayments, which is counter-intuitive. Instead of checking affordabilty at the start (which can be time consuming and expensive) lenders prefer to build a provision into their margins to cover any losses. The problem for lenders in recent years has been that bad debt levels have spiralled and banks have been unable to accurately forecast future bad debts.

So tightening up the rules on the selling of store cards with discount promotions at the tills seems like a good idea - if only to protect lenders from their own practices.

David Cameron announces proposed change to 'insolvency threshold'

Conservatives indicate willingness to tinker with insolvency rules

On The Andrew Marr Show on BBC1 yesterday, Conservative leader David Cameron announced plans to boost small busineses as part of a package of measures to stimulate jobs, wealth and enterprise and to allow the country to "trade its way out of recession." As well as reducing the amount of time it takes to set up a new business and encouraging social landlords to permit tenants to operate a business from their homes, Cameron announced that a Conservative Government would raise the "insolvency threshold" to £2,000 from the current level of £750. He stated that more small businesses had gone "bankrupt" in this recession than previous ones and that "a number have been pushed there by the government itself."

At present, a creditor can petition for an individual's bankruptcy if they are owed more than £750, whilst a company can be wound up following a statutory demand for a debt in excess of £750. But a company can also be wound up by the court if a creditor obtains a judgment for any amount and is then unable to enforce it - for instance, if bailiffs report that there are no valuable assets to remove. So increasing the threshold for companies won't necessarily make it more difficult for a creditor to wind up a struggling company, but it will give some protection for sole traders, who make up the majority of small businesses in the UK.

The threshold of £750 hasn't changed since the Insolvency Act gained Royal Assent in 1986 so it seems reasonable to revisit it. In the 24 years since the legislation was passed, inflation alone would mean that £750 would be more like £1,700 in today's money. I suspect that the threshold hasn't been revisited sooner because the legislation was poorly drafted: the threshold relating to bankruptcy can be changed by statutory instrument but there is no corresponding provision for company winding-up, making it all a bit messy.

But there is another issue: by raising the insolvency threshold, will this lead to more businesses experiencing further problems of non-payment by customers? Would this send out the wrong message to businesses, encouraging them to delay payment? I hope not.

Bankruptcy need not be the end of the world - but act very quickly

A bankruptcy horror story (that could have been avoided)

I was contacted by a solicitor friend of mine the other day. He had a client who had been made bankrupt after taking an ostrich-type approach to an unpaid tax bill. The client was able to pay the bill in full but he'd procrastinated for so long that HM Revenue and Customs had successfully petitioned for bankruptcy. As the client is a businessman with relatively complex financial affairs, the Official Receiver immediately appointed an insolvency practitioner from a top-10 Leeds firm to act as the Trustee in Bankruptcy. The solicitor had agreed with the client that he would immediately pay the debt in full and apply for an annulment of the bankruptcy order - reasonable advice, given the fact that the client had sufficient funds to cover the debt. However, payment wasn't made immediately and in the five days that it took the client to get the cash together to pay off the debt in full, the Trustee had accumulated fees of over £20,000. Now, these fees will be disputed, but I'm sure that the Trustee will be able to justify taking the steps that he did to begin his administration of the bankrupt's estate, to protect the interests of creditors.

All in all, an expensive mess.

And it could have been avoided.

A similar case cropped up just a few weeks ago. A bankruptcy order had been made against the client and whilst he had sufficient assets to pay all his debts in full, the assets weren't liquid and would take some weeks or months to sell. We immediately contacted the Official Receiver, who was poised and ready to appoint a Trustee in Bankruptcy. As we had already been instructed, the Official Receiver agreed to hold off for two days, during which we prepared a proposal for an Individual Voluntary Arrangement ("IVA") which provided for all debts to be paid in full, once a property had been sold and the equity released. In the current climate, we don't know exactly how long this might take, so the client has agreed that as soon as it is sold, all creditors will be paid in full with interest. We then applied to the court for an Interim Order, preventing any further legal action (like a Trustee in Bankruptcy being appointed and racking up fees) and a meeting of creditors was organised to approve the IVA, which they happily did, as they were getting paid in full with interest.

This way, we've saved the client many thousands of pounds of fees (and also any other costs of the bankruptcy, such as ad valorem fees which are payable at a rate of 17% on assets that fall into the Trustee's hands). The client has a manageable strategy for repaying the debts in an orderly and structured way, not a "fire sale" for a fraction of the true value. In addition, the bankruptcy order will be annulled in the next few days, on the basis that creditors have opted for the IVA instead. All in all, a job well done.

So if you are approached by a client who has just been made bankrupt - call me straight away. We can discuss the case and decide the best way forward. For a no-obligation, impartial and free chat, call me on 01709 331300. It's good to talk.

It's beginning to look a lot like (an expensive) Christmas

Millions get into debt this Christmas

For many people, the festive period will bring an unwelcome present - debt. Research has shown that four million people in the UK have gone into debt to pay for Christmas in 2009 and nearly three million people haven't yet finished paying off Christmas 2008.

The research was carried out by the insolvency profession's leading association, the Association of Business Recovery Professionals (known as "R3") of which I'm a member and, I have to say, I'm surprised that the number isn't higher. Only four million people borrowing money to pay for Christmas? Come on, I'd be surprised if there's four million people who haven't borrowed money to help pay for Christmas. I know that I have made a dent in my credit card.

Of course, debt isn't always a bad thing. Credit is used to help pay for things that we haven't got the cash to buy right away. Affordable debt is no problem. As long as we have a plan to repay the credit, as long as it is part of a careful household budget, there's no problem. The problem only comes along when the credit can't be repaid as planned. So things like poor budgeting, building up too much credit, a change in personal circumstances (like redundancy, or starting a family) or the onset of poor health can lead to affordable debt becoming a debt problem.

The profession is also forecasting that over 150,000 people will become insolvent in 2010 - that is to say, they will either go bankrupt, enter into an individual voluntary arrangement ("IVA") or become subject to a debt relief order ("DRO"). Many tens of thousands more people will also go into debt management plans ("DMPs").

The different options can be confusing, so getting the right advice is essential for anyone who is facing debt problems. A licensed insolvency practitioner can help - we will discuss all the options, so the individual can make an informed decision about what's right for them. So feel free to give me a call - I'm always happy to chat and I offer an initial consultation that will be completely impartial and free of charge, at a time and place to suit. For friendly and impartial advice, my number is 01709 331300.