Bankruptcy Is A Worryingly Easy Option For Young People In Debt
Over the past 20 years credit has become part of UK culture. Buying goods using credit cards, personal loans or store finance is no longer seen as taboo and arguably has become encouraged through advertising and store promotions. On the face of it, using credit is in itself not a bad thing as long as the debt can be serviced. The problem lies however, where people take on too much debt and find themselves in a position where they are unable to keep up with the repayments.
I believe that the level of personal debt in the UK has significantly increased on the back of house price increases seen between the late 1990s and 2007. Individuals have been able to borrow money in the form of personal loans and credit cards and then release equity from their property to consolidate the debt if the monthly repayments become unmanageable.
With the onset of the credit crunch and subsequent fall in the price of property, people’s ability to consolidate their debt through equity release has significantly reduced. As such, where debt problems occur, individuals are considering direct debt solutions such as debt management, individual voluntary arrangement and bankruptcy. The formal insolvency statistics issued by the insolvency service on the 1st May 2009 showed an increase of nearly 20% on the same quarter in 2008 in the number of people declaring themselves formally insolvent (using either bankruptcy or IVA).
Where the debtor in trouble is a homeowner, unsecured creditors are arguably more protected because debt solutions such as an IVA or bankruptcy will normally involve equity release from property. Creditors should therefore rightly worry more about debtors who do not own property. Many younger people have not been able to get on to the property ladder in the past 15 or so years because of the rate of growth of house prices. However, these people have been allowed to borrow money on an unsecured basis often to a significant extent.
Over the past 5 years I have seen more and more young people between the ages of 20 and 30 years old who are struggling with serious debt. It is not uncommon for these individuals to generate debts of £30,000 and beyond often through the use of credit cards and personal loans. What should be worrying for creditors is that with no property to worry about, these people are beginning to realise that Debt Management Plans and IVAs will mean lengthy periods of debt repayment. On the other hand by declaring bankruptcy, young people with no property are likely to repay little or none of their debt.
The fact is that most young people who do not own property can go through the bankruptcy process with impunity. They are not worried by the publicity associated with bankruptcy and understand that the process may well be over within 12 months. In addition, young people are regarding banking institutions as being almost the enemy. They have seen the banks posting huge profits during the boom years and more recently receiving huge government bail outs. As such, young people do not feel any sense of guilt if they find themselves in a position where they are unable to repay their debts. They are therefore very unlikely to make an effort to try and repay their debt through an IVA or Debt Management Plan and much more likely to take the bankruptcy route.
In my experience, the majority of young people are not concerned with any stigma attached to bankruptcy and more and more they are choosing this route to deal with their debt problems. The banking industry should be aware of this situation and think carefully about their lending criteria for younger people.
