News that the Citizens Advice Bureau witnessed a 179% rise in inquiries about redundancy in the first three months of the year has prompted Payment Protection Insurance lobbyist Sara-Ann Burgess to review the options available to people who fall into debt because of a lost income.
She comments: “Recent statistics show more and more indebted people are opting for bankruptcy or Individual Voluntary Arrangements. A bankruptcy order may be obtained by a creditor for debts of £750 or more, or a debtor can bankrupt him or herself by filling in forms at a County Court. The debtor’s assets are sold and money distributed to the creditors, after insolvency practitioners’ fees are taken. If there’s a shortfall, it’s written off and in most cases, bankruptcy ends after one year when the slate is wiped clean.
However, bankruptcy is usually seen as a last resort as there’s a risk of losing your house, your financial downfall is made public and it will affect your ability to secure credit in the future.”
Sara-Ann continues: “IVAs, on the other hand, are more of a private matter. They allow people to settle their personal loan debts and outstanding credit card balances within a reasonable period of time with their creditors. An IVA is a legally binding contract between debtor and creditor – a payment period and amount is agreed, usually around five years and whatever the debtor can afford - and once the final payment is made, any remaining debt is legally written off.
“They’re organised via an insolvency practitioner and although there are cases where a property has to be remortgaged to release funds, you should at least keep your home.”
The Government Insolvency Service in May announced that the number of bankruptcies and IVAs had reached new highs in the first three months of 2009. There were 19,062 bankruptcies and 10,713 IVAs – 19% more than a year ago - and insolvency specialist Begbies Traynor predicts personal insolvencies could top 125,000.
But credit risk management firm TDX warns that as the number of people opting for these arrangements continues to grow, so too will the percentage of those unable to meet the criteria required by IVAs or other debt management plans. Analysis shows that of all IVAs activated, 40% were never completed and 15% stopped paying in the first year.
In April, a third option was introduced; Debt Relief Orders. Described as cheap, accessible insolvency options for people with debts below £15,000, (excluding student or secured loans, child support payments, arrears and court fines) and little or no prospect of repaying, they effectively allow them to discharge their financial liabilities after a year.
Sara-Ann explains: “There’s a strict criteria that must be met before the Insolvency Service will approve an application. The debtor has to have no more than £50 a month in surplus income, less than £300 in assets (including savings, shares, cars, caravans, antiques etc) and must not be homeowner. Given the CAB says the average debt is £16,971 and more inquiries are coming from homeowners, this would exclude a lot of people.”
Unemployment figures released this week indicate the redundancy spiral is set to continue, despite many believing we are heading out of recession. In the three months to April, the jobless total topped 2.261 million, the highest since November 1996.
Sara-Ann concludes: “With more people contacting the CAB with redundancy concerns, I would like to see more advice and guidance on PPI – it will help people tackle their debt problems before a job loss occurs and provide a support mechanism should the worst happen. I therefore believe it should top people’s ‘things to consider when reviewing finances’ list.
“Those with this cover will get their monthly financial commitments paid for up to a year if they lose their job, removing the need to have to consider any insolvency or debt relief options. By taking out a policy now, you can effectively stabilise your finances should circumstances change.”
PPI does not have to be purchased from loan or credit card providers; low-cost, good quality products are available from standalone firms offering superior cover and benefits. For example, British Insurance charges £3.40 per £100 of benefit for an unemployment-only policy. This means a person with financial commitments costing £500 a month would pay £17 a month in premiums. In the event of job loss, £500 a month would be paid for up to a year.
British Insurance’s policies offer back to day one payouts, age-rated premiums, a choice of cover options and carer support. There’s also a free back to work service for claimants with unemployment cover which includes; self help guides, access to a specialist website, job vacancy database and telephone advice via employment counsellors. Claimants can get ongoing support and guidance on work searches, career changes, state benefits, managing time effectively, tips on CV preparation and help with interviews.
Tags: Payment Protection Insurance, PPI