Peter Payack Finance

When the nation’s economy is doing badly, it makes sense to prepare for bad news. People tend to reduce their spending for all kinds of reasons.

It might be because they’ve lost their job. It might be because they’ve seen their income fall, whether they’re earning less in terms of bonuses, commission or overtime, or because they’ve actually had to accept a pay-cut or shorter working hours. Or it might be because they’re simply worried about the effects of the recession - even people whose income hasn’t been affected at all by the recession are ‘tightening their belts’ and cutting back on non-essentials.

All this, of course, can have a knock-on effect. The less people spend in the shops, the worse individual businesses will do, which is clearly bad financial news for their own employees.

For people with debts, the thought of dealing with a reduced income can be particularly worrying. As well as rent/mortgage, utility bills, petrol, food and all their other essential expenses, they’ll need to keep up with their payments to unsecured debts. The monthly payments which seemed no problem a few months ago might suddenly be a real challenge.

They might even find they simply can’t stay on top of all their debts. In cases like this, debt management might be able to help. A debt management organisation may be able to negotiate with their unsecured lenders (credit cards, store cards, personal loans, etc.), asking them to consider accepting a few changes to their repayment terms so the individual can afford to keep up with their debt repayments.

For example, they may agree to accept lower payments, based on how much the individual can realistically afford once they’ve accounted for all their essential expenses.

And/or they may agree to reduce (or even freeze) the interest they’re charging on the debt, so the individual knows their payments are reducing the debt itself, rather than just the interest.

This can make a huge difference to the individual’s finances. Since their payments to their unsecured debts are based on their disposable income (what’s left after their essential expenses), they’ll know they can keep on making their payments to their mortgage/rent, so they won’t face the risk of eviction - a major worry for many people who are facing financial problems.

Having said that, reducing the size of their monthly payments will mean they’re repaying that debt more slowly. That means it’ll take longer to repay the debt - and unless their lenders reduce the interest rate by enough, it can cost more, as the debt will have longer to accrue interest.

Plus, a borrower’s credit rating can suffer if they fail to repay the debt as originally agreed - by negotiating lower monthly payments, for example - although there’s a chance this will already have happened, since a debt management plan isn’t an option unless they can’t afford to keep up with payments to their debts, so they may have already breached the repayment terms before their debt management plan even started.

LONDON, UNITED KINGDOM - Following the release of insolvency figures in Scotland in the first quarter of 2009, financial solutions provider Think Money pointed out that the impact of the LILA (Low Income Low Asset) route into insolvency could shed some light on the probable impact of the DRO (Debt Relief Order) on insolvency figures in England and Wales.

In Scotland, 5,693 individuals became insolvent in the first quarter of 2009. This was an increase of 71% compared with the first quarter of the previous year. Significantly, the number of bankruptcies stood at 3,722 - an increase of 158% on the same time period last year (before the introduction of the LILA).

According to www.scotland.gov.uk, the ’significant increase in bankruptcies is attributed to the introduction on April 1, 2008 of a new route into bankruptcy for people who have low income and low assets’.

It should be stressed that (unlike the LILA) the DRO is a form of insolvency, but will not be counted as a form of bankruptcy.

“Looking to England and Wales,” said a spokesperson for Think Money, “it’s fair to assume the introduction of the DRO will also have a significant impact on insolvency figures. Accountants KPMG have stated that they expect individual insolvencies to top the 150,000 mark this year - a 40% increase on last year’s figures - partly due to the introduction of DROs and partly due to the worsening state of the economy.

“Before the DRO was introduced, many individuals had little opportunity to clear debts which had become unmanageable, as they were unable to afford the fee of around Pounds Sterling 500 which bankruptcy requires.

“Costing just Pounds Sterling 90, the DRO is far more accessible than bankruptcy, and may be suitable for many of those who would already have had themselves declared bankrupt, had they been able to afford the fee. In other words, we may see significant interest in DROs from people whose financial situation has been serious for some time.

“However, the introduction of the DRO is unlikely to be make any difference to the majority of people considering an IVA (Individual Voluntary Arrangement). According to KPMG, the average debt owed by someone entering an IVA in the previous quarter was Pounds Sterling 47,800, putting them well beyond the Pounds Sterling 15,000 limit for DRO eligibility.

“As for the country’s economic problems, we may also see people entering a DRO as a result of the recession, although we would stress that no form of insolvency is an appropriate way to address short-term problems. Someone who has recently lost their job but is hopeful about finding new employment in the near future would be better advised to look into alternative, more temporary, ways of helping them survive a (hopefully) short-lived period of financial difficulty.

“In fact, anyone in a DRO is required to report any change in circumstances to the official receiver - who may decide to terminate the DRO if they believe the individual is now capable of making payments to their creditors.

“This is why Think Money stress the importance of providing a comprehensive range of debt solutions. In our experience, this is an essential part of providing a tailored service that truly caters to the individual needs of each customer.”

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