Business | Features
Buy now, pay never
More ordinary people have been seeking bankruptcy as a painless escape from their debts since the UK law removed its stigma and consequences.
- By Ross Clark and Karyn Miller
- Published: 00:00 August 14, 2006
Not everybody waiting in the clerk's office in the Bankruptcy Court at the Royal Courts of Justice seemed unduly concerned by the fate that was about to befall them. Several bored-looking women, seemingly oblivious to the cause of their troubles, were thumbing through lifestyle magazines.
"It's slightly embarrassing," said Rose Garner, a smartly dressed, 27-year-old single mother of two, who had discussed her situation with the Citizens Advice Bureau and then asked to be declared bankrupt, after running up debts of £15,000 on credit cards and goods from catalogues. The items were, she said, "necessities but not always".
"But bankruptcy isn't going to affect me, because it only lasts for a year," Garner said. "There aren't any consequences, if you don't own a house or a business. Why cripple myself with the minimum repayments when I don't have to?"
Until recently, bankruptcy was an exotic fate suffered by big-time crooks and pathetic figures from the pages of Charles Dickens, himself the son of a bankrupt.
No longer. Figures released by the Bankruptcy Service last week revealed that 26,021 people were made insolvent in the second quarter of this year, a shocking 66 per cent rise on the same period in 2005. Of these, 14,915 were made bankrupt, a rise of 32.5 per cent over the year. All but one of the remaining 11,106 entered Individual Voluntary Agreements (IVAs) where the individual avoids bankruptcy by formally agreeing to a compromise with his creditors. These showed an even sharper rise, more than doubling over the course of a year.
New culture
The British economy has frequently been described in recent years as being powered by a "buy now, pay later" culture. It seems it is quickly evolving into a 'buy now, pay never' culture. It isn't just credit card companies that are left paying the cost: some people are even declaring themselves bankrupt to escape demands from the Inland Revenue to return overpayments of tax credits.
This cannot be what the UK government had in mind when drafting the 2002 Enterprise Act, which sought to remove the stigma from bankruptcy. To this end, the act provided for most bankrupts to be released from bankruptcy after one year, in some cases even less, compared with the three-year period that was standard beforehand.
Also, the act removed some of the more lingering consequences. People made bankrupt in the early 1990s are still being pursued by creditors for the increase in value of their homes. The 2002 Act changed the regime for people declared bankrupt after April 1, 2004: creditors have only three years to claim a debtor's assets.
Two years after the changes came into effect, there is little evidence to suggest that they have done much to encourage enterprise, and a great deal to suggest that they have encouraged feckless consumers, eager to walk away from their credit card debts.
A survey of bankrupts, earlier this year by John Tribe, of Kingston University's Centre for Insolvency Law and Policy, found that the typical bankrupt, far from being a thrusting entrepreneur down on his luck but ready to dust himself off and start again, is a poorly educated council estate-dweller, hot from a credit card binge.
A mere 16 per cent of respondents to the survey said they had been made bankrupt by business failure, and some appeared ill-suited to returning to life as an entrepreneur.
By contrast, 49 per cent of respondents admitted they had got into trouble over credit card debts.
Recklessness
Many respondents perhaps fell into the category of reckless consumers, though most sought to blame their problems on other family members: one man assigned his troubles to an "out-of-control wife".
The overwhelming majority are from the lower end of the income scale and have gone down owing relatively small amounts. Just 13 per cent had owned their own home before their bankruptcy, while 47 per cent had gone bankrupt owing less than £30,000.
Many of these people, suggested the survey, were persuaded to take the bankruptcy route after hearing about it from family and friends, giving credence to the anecdotal evidence that bankruptcy is becoming a lifestyle choice, promoted through conversations in pubs and clubs. Remarkably, bankruptcies have risen to record levels at a time when the economy has been doing well.
Even in 1992, the peak of the last recession, when interest rates reached 15 per cent and house prices collapsed, personal bankruptcies rose no higher than 32,106 little more than half the 55,982 recorded during the past 12 months.
Societal change
The figures for total personal insolvencies which include individual voluntary agreements, are even more dramatic. In 1992 there were 36,794; compared with 88,164 during the past 12 months.
The dramatic rise in people walking away from their debts by declaring themselves bankrupt has upset the banks, who, in a reversal of the usual order, lined up last week to denounce their customers' behaviour. "What does debt mean?" asked Lloyds TSB's chief executive Eric Daniels, announcing a 20 per cent rise in bad debts in the first six months of this year.
"Twenty years ago, it was something that people would naturally repay. Today, advice is being given to students that the minute they graduate they should default. It is a huge societal change."
Barclays, too, gave changing attitudes to bankruptcy as an explanation for a 50 per cent rise in bad debt. In the first six months of 2006, it had to write off £1 billion in bad debts because of customers who defaulted.
The rise in bad debt did not prevent both Lloyds and Barclays posting large profit increases, but it does raise the question of how much longer the economy can withstand the growing practice of consumers simply walking away from their debts. After all, it might collapse if we all defaulted on our mortgages.
"It is probably fair to say that we are not anywhere close to the level of personal bankruptcies that would have a macro-economic effect," says Jonathan Loynes, of Capital Economics. "But the rise in insolvencies will further reduce the possibility of strong household spending growth."
- The Telegraph Group Limited London, 2006
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