Over recent years Worrells has handled a significant number of Controlling Trustee appointments and, when the proposals are accepted, the resulting Personal Insolvency Agreements.
The large number of these appointments has allowed us to identify some common factors amongst debtors and some similarities in the underlying financial issues that gave rise to the debtor’s insolvency.
Because of this information, we can make some general comments about the debtors and their financial circumstances (remembering that these comments only relate to the body of work that we have done).
• The debtors are nearly always salary earners in continuing employment, rather than business owners or company directors who have suffered a business or company insolvency and are now unemployed.
• The salaries that the debtors earn often range from $50,000 to $100,000 per annum. That is they are your average wage earners or better, people who most others would consider ‘better off’ financially.
• Their major creditors are invariably finance institutions and the majority of debts are for personal loans and credit cards. In line with the fact that most of these debtors are employees, their insolvency is not being caused by business debt or one or a series of business events. It is the result of an accumulation of consumer debt.
• A majority of the debtors own their own home. These homes usually have mortgages registered on the titles, but usually only for the loan to purchase the property. As there is no business debt, there is no debt on the property that relates to other entities or businesses and no debts from guarantees. There is usually some equity in the property, but not much.
Most of the debtors are white collar professionals, middle management or similar. Their financial problems arose simply because they accessed far too much consumer debt to fund their lifestyle. Often the trigger that caused the need for some type of insolvency appointment was a reduction in income or the temporary or permanent loss of their or their spouse’s job. This loss of employment led to insufficient income being earned to support the payments on the debt.
Most of these debtors had been living on the edge of insolvency for some time as they tried to meet payments to the financial institutions. Many times they shuffled debt from one institution to pay another institution which achieved nothing other than a short reprieve.
Further common factors are:
• The outstanding debt spans over a period of years. Often the debtor is simply making the minimum repayments on the older debts whilst seeking further access to finance through loans or credit cards to continue to live their lifestyle and this had been a recurring pattern for some time. In short the debts continue to build at a steady rate rather than being incurred all at once. Debt levels are rarely reduced.
• In almost all cases the debtors own nothing of value outright. Their cars are leased or financed and their house is mortgaged. They have no or few investments and if they do there is no equity in them. They usually have their own personal effects, but nothing else.
• Their only chance of getting a Part X proposal accepted is that they have an earning potential and can make regular contributions over time.
The major factor leading to their insolvency is the debtor’s willingness to live a lifestyle which is beyond their means. The debt needed to fund this lifestyle gradually builds up until it becomes unmanageable, and some trigger (such as the loss of a job) pushes them over the edge into insolvency.
And this is a common factor regardless of the level of income. The economic principle of ‘marginal propensity to consume’ is fully in evidence. The debtors feel that they have a safe regular income and try to fund a lifestyle that they cannot afford from it.
We can also make a few comments on the actual process and results of the proposals.
• Given that the debtors are usually earn a reasonable income, the proposed personal insolvency agreement generally will give a better outcome for creditors that a bankruptcy. The income allows the debtors to service the contributions required under the Personal Insolvency Agreement. In most cases, the return to creditors in a bankruptcy would be minimal as the only money to be received would be from income contributions (these will usually be less than the contributions offered) and the bankruptcy would require significantly more work and investigation and thus costs.
• The typical return to creditors from these agreements has been between 50 and 70 cents.
• Appointing a controlling trustee often relieves the stress on the debtors in that creditors are no longer pursuing them for the debts. They only have their obligation to make payments under the personal insolvency agreement, and those payments should be manageable.
It seems that many people are still comfortable with the approach of ‘buy now, worry later’ and do not think about what they are going to do when ‘later’ arrives – except get more debt.
Others might say, and no doubt with a degree of accuracy, that the cost involved these days in meeting mortgage payments and bringing up children in reasonable comfort is getting beyond the capacity of even two income families.