Accountants see personal debts double

Date: 06 February 2007

PERSONAL insolvencies in LOCATION are rising at a rapid rate with some unsecured debts reaching £40,000, according to Mitchell Charlesworth Chartered Accountants.

Insolvency experts at the firm say their regional findings mirror the growing insolvency rates across the UK, which are identified by the Insolvency Service.

There was a 44.1 per cent rise in personal insolvencies between October and December 2006, compared to the same period in 2005 – and a 7.1 per cent increase on the previous quarter as more people feel the pressure of mounting personal debt.

Jeremy Oddie, a partner at Mitchell Charlesworth, said: “The significant increase in personal insolvency figures were exactly what we were expecting. Some of it can be blamed on the increases in interest rates and energy prices. Since August 2006, there have been three rises in interest rates, which can be translated into an average of £15 per month for a typical household.”

“However, there are large numbers of people who are no longer able to deal with their debts. In simple terms, they now owe more than they are able to repay and are only just able to keep pace with the minimum repayment obligations.

“Unless help and assistance is available to these people to overcome this problem, matters will only get worse.”

There were 12,741 IVA’s registered between October and December 2006 and 17,063 bankruptcies. An IVA is an agreement between borrowers and their creditors on how they will repay their debts.

Julie Beavis, also of Mitchell Charlesworth, explains: “We are seeing time and time again the amount of personal debt rising. Some people’s unsecured lending has more than doubled from around £15,000 or £18,000 three or four years ago to debts exceeding £40,000 today.

“Basically, people are spending well above what they earn and all it takes is a couple of interest rate rises or an extra few bills landing on their doormat to push them over the edge. And these people are just ‘Mr and Mrs Average’, employees who own their own homes but typically owe around £20,000 each in unsecured borrowings.”

Jeremy further stated “This country appears to have spent its way ahead of the last recession on credit and that seems to reflect the national psyche towards debt. It astounds me that people continually use credit cards, overdrafts and loans without realising that they have to pay it back.

“The situation is not helped by the huge amount of pressure local bank branch managers are being put under to meet sales targets and they are apparently more willing to loan money.

“Many mortgage providers are offering home loans of five times a person’s salary to help people onto the property ladder, however many are now using it to take equity out of their homes to pay for their unsecured financial problems. Without doubt, the situation is only going to get worse.”

On the business front, the sector suffering from the greatest number of liquidations for July to September 2006 was construction, which commanded 13.84 per cent of liquidations, while financial and business services saw 24.34 per cent fail.

Julie added: “Many failures are OMB’s (owner-managed businesses) because SME’s (small to medium sized enterprises) find it difficult to identify sources of finance to assist in funding working capital and investment – which are vital to maintain and further growth.

“Furthermore, larger customers are demanding extended credit terms that the SME’s can ill afford to grant.

”OMB’s and SMEs are still concentrating on creating profits, which is all well and good, but they cannot spend profit. Cash generation is key to the survival of a business – if they can generate the cash then the profits naturally fall in line.

“Directors and lenders alike are failing to recognise the early warning signs of impending financial problems.”

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