Why paying off your personal debts may not be such a bad idea after all, explains Westcountry insolvency lawyer Andrew Knox and family lawyer Mark Smith…
As the Prime Minister David Cameron said in his recent party conference speech, “We are in a debt crisis and the only way out of a debt crisis is to deal with your debts.” this is certainly sound advice.
While entire countries such as Greece are defaulting on their debt payments, the likelihood is that you have plenty of individuals’ right here in the Westcountry about to or doing the exact same thing – the debt crisis is having a clear impact on everyday life..
And it is not just individuals being affected – small and medium sized business owners in the South West may well have over extended themselves and find that they are in a similar position. Many people might have had the foresight that the credit crunch was coming and steeled themselves for the tough times, but because it has been such a long and arduous road, the finances they had prepared, or the cost or job-cutting measures taken are now starting to be exhausted.
We know that according to recent statistics from the Insolvency Service, in the second quarter of this year there were more than 30,500 personal insolvencies in England and Wales – a figure that was down 12 per cent on the same period in 2010. The number of bankruptcies, included in this figure, was also down nearly 26 per cent – somewhat of a paradox you might think.
On the face of it, that may sound like a trend going in the right direction, but we do think this is just the very tip of the iceberg and that we may well see an increase in the number of bankruptcies in the Westcountry over coming months and years, not helped at least by the banks’ lending squeeze.
Where you have bankruptcies and insolvencies, these are often linked to family problems – very often a consequence of a marriage or relationship breakdown is bankruptcy or relationship problems are caused or contributed to by money worries. The result is often a fight between creditors and spouses over who is entitled to the assets; especially the matrimonial home. Depending on the timing, the matrimonial courts can trump the bankruptcy court.
If there are matrimonial proceedings and the court has made an order, if that is settled prior to a bankruptcy, in the majority of cases the court order is not capable of being overturned. If there are money problems and, as a result of that, a break-up follows, there is a risk that the creditors might get there first and upset the apple cart.
It is fair to say there are a number of myths surrounding bankruptcy and family break-up that need to be dispelled – perhaps one of the most common we hear is that declaring yourself bankrupt absolves you from the future provision of child maintenance or other payments – be warned it doesn’t. You are still liable and there are certain other debts that you are not released from – such as mortgages or debts secured on your property – and this is only part of the overall story. While some people may think that bankruptcy is the solution to all their problems and worries, it might not necessarily be the answer.
So how do you go about resolving these conflicts? The clearest message is quite simply that the earlier you seek advice, the greater your options are and this applies to both debt and family-related issues. Cynics might suggest that, as lawyers we would say that, but it is absolutely true. The irony is that the cost of professional expertise can often be a fraction of value of the advantages obtained in the long run.
It is surprising how often people will make a decision about their own situation solely on the basis of an unqualified friend or a work colleague’s experiences. Simply because their predicament may be similar to yours, there are often a whole host of differentiating factors that may come into play. In our experience, it is rare to have an exact set of circumstances that apply across the board, so how it happened for someone else is not necessarily how it will pan out for you.
Sometimes debt problems arise and it is not always someone else’s fault – we see a lot of people where illness, redundancy or sheer bad luck at the end of the day causes knock-on problems. In the past it has been about cheap credit and the result is that it is finally coming home to roost. Money has been thrown at people who have happily taken it, letting the good times roll without having to think about how it is going to be paid back. It is when that merry-go-round stops that reality really bites for many.
Andrew Knox is an associate in the insolvency team and Mark Smith a partner in the family team with Stephens Scown LLP.