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.