Debt & Bankruptcy Issues in the UK

This week sees the 40th anniversary of the credit card in the UK, so we thought we would write a little on the history of the credit card and its use in the UK.

The first credit card introduced in the UK was the Barclaycard, issued by Barclays Bank. Barclays sent one million unsolicited cards to customers who were thought likely to use the card responsibly. At this time most people in the UK didn’t have a bank account even, and paid for everything by cash. Also there was little support for the new-fangled credit cards with the point of sale machines being either scarce or restricted in usage to selected staff.

At this time, credit card bills were paid off in full at the end of the month, but a change in UK legislation allowing credit card companies to offer extended credit saw their use take off.

In the early 1970’s a consortium of UK banks including Lloyd, the Midland, and Nat West got together to launch a rival credit card known as Access.

Today the consumer can choose from over 1300 different credit cards, and there are some 75 million credit cards and other charge cards in the UK alone. In 2005, shoppers spent over £60 billion on credit card purchases, with the number of online purchases increasing.

Credit card borrowing can be a relatively expensive way to borrow money though, and their usage is declining as more and more people switch to debit cards. People who are heavily in debt due to credit card spending could well save money on a debt consolidation loan. In any case, anyone struggling with credit card debts would be advised to see professional debt advice.

The BBC online news website is running a personal account of a UK woman's experiences as she heads for a debt crisis having become pregnant.

Sayara Beg is a married, freelance IT specialist from East London. Her husband owns a French restaurant that had seen a slump in profits after the London bombings, but had apparently recovered as the couple began their planned pregnancy in November 2005.

To finance the restaurant the couple had to re-mortgage the family home as well as two other small properties. Things looked good for the family until late February when another slump in the business meant that there soon wouldn't be enough money to keep their loan and credit card repayments.

Ms. Beg sought temporary contract work but was apparently given a months notice when her employers found out she was pregnant. Ms. Beg seems to be a responsible borrower who is only recently struggling to pay her debts because of her pregnancy.

In her compelling diary, she reports how she tried to contact her creditors to inform them of the family's short-term debt problems, but seems to have met with little support or understanding from her creditors. Ms Beg, who claims to have an impeccable credit history, struggles to make financial arrangements for her mortgage, secured and unsecured loan payments with varied success.

After researching the internet for professional debt management advice, she reportedly found specialist debt companies offering debt consolidation loans or debt management plans, which apparently didn't suit her situation. She did however come up with a plan to apply for a debt repayment holiday, with the interest on her debts frozen for a year, until she was ready to return to full time employment after the pregnancy.

In her online diary, she documents the ups and downs of her struggle to re-negotiate her debts with her creditors, with perhaps the lowest point in her struggle reportedly being questioned by her bank manager whether this was the right time to have a baby.

Ms Beg's struggle to be a responsible borrower and her account of her attempt to come up with a financial plan to deal with her debt problems makes for absorbing reading. Her online debt diary can be found on the BBC "Borrowing and Debt" website.

Nearly 24,000 people either declared themselves bankrupt or took out an IVA (individual voluntary arrangement) in the first 3 months of 2006; the highest ever number of insolvencies in the UK.

The threat of bankruptcy to an individual is bad enough, but bankrupts' partners are increasingly in the firing line. If a person in the UK becomes bankrupt their partner could in an extreme case also become liable for half of any remaining debts, and could even face the possibility of losing their home.

Keith Tondeur, national director of the debt charity Credit Action, discussed what can happen if a partner becomes bankrupt in a recent interview with the Guardian newspaper.

He acknowledged that most people facing insolvency or bankruptcies are primarily concerned about what will happen to the family home.

Usually, if a property is solely in the name of the bankrupt individual, then the home will be sold and used to pay off debtors, although the sale can be delayed for up to a year to allow a family to find new accommodation.

If the home is jointly owned, the bankrupt's partner will be given an opportunity to buy his or her share of the home, and Mr Tondeur advised that this would usually be the best option for many if they could afford to do so.

In the case where a bankrupt's partner cannot afford to buy the remaining equity, then the home would likely be sold with half the sum raised being used to pay off bad debt, and the other half would be passed to the non-bankrupt partner for him or her to keep.

It's not just partners' homes that are affected by bankruptcy. Partners are also liable for other debts in joint names, such as a bank overdraft, for example, for which the partner will likely be pursued for any outstanding debt after bankruptcy has been declared. If a joint account is in credit then some of the money will be used to pay off creditors, and some may be returned to non-bankrupt partners depending on the decision of the Official Receiver.

Clearly there are many complex issues regarding bankruptcy and its implications for bankrupt individuals' husbands, wives or partners, and individuals in this situation are urged to seek professional bankruptcy advice.

Some finance companies in the UK have contributed to a long list of scandals involving poor or deceptive debt advice. These scandals have arisen again recently as part of a new scam left many people on the brink of bankruptcy.

In this latest scandal, borrowers are being advised unethically to take out expensive debt management packages that serve the interests of the lenders, to people would be much better off just saving their money or even filing for bankruptcy. The number of these phoney financial advisers who tell clients to take out the loans which will net the best profit for the banks giving these loans is constantly rising, a major cause of concern for many.

Pressure has been applied to help eliminate the number of these debt advisers who are giving poor financial advice, yet none of these plans seem to be effective as the number of financial advisors continues to rise relentlessly to serve a growing market for debt and bankruptcy advice.

Peter Luff MP, chairman of the backbench Trade and Industry Select Committee, said: 'I cannot think of any legal, political or practical reason that this should not be brought in.' His call for action echoes that of the profession's watchdog, the Insolvency Practices Council.

The results of these facts can be shown in the fact that in the first quarter of 2006, there were 15,389 bankruptcies, a 51.2% rise on the same period in 2005. Certainly, something must be done urgently to halt this alarming trend in the financial marketplace.

According to the Consumer Credit Counselling Service (CCCS), the number of wealthy people now struggling to pay off all of their debt is steadily increasing. Reports show that those who are currently earning over £30,000 a year, are the ones asking for the most debt management guidance as those in this income bracket asking for financial aid has risen by 257% in the past three years. Some of the causes that are attributed to this are high mortgages on their expensive homes, as well as school fees and their spending habits.

"Accepted wisdom suggests that a take-home income of £30,000 per year is enough to allow most families to be able to manage the demands on their income," Ms Saxon, the author of this report said. "But large mortgages, rising school fees, keeping up with the Joneses and the increasing availability of credit have made debt a normal part of life for many of the middle class."

The average debt amongst the highest earners that were seeking debt advice and help from the CCCS was nearly £70,000.