- Bankruptcy in young families is more likely than in other household types.
- There are 5 different types of insolvency.
- Single parents have the largest insolvency problems
According to the statistics of the Money Charity, 264 people a day declared insolvency or bankruptcy in the UK in 2016. This works out to one person every 5 minutes and 28 seconds. Of these, 38% were cases of bankruptcy in young families. First of all, we will analyse what this statistic about bankruptcy in young families means. We will also look at how to declare bankruptcy and the consequences for your financial life.
In the second part of this report, we will try to answer the questions; why is bankruptcy in young families more common that in other sectors of society? What/who is responsible for this trend and what solutions are there to help reduce bankruptcy in young families?
What is Insolvency?
Personal insolvency means that you are unable to pay your creditors the money which you owe them. Creditors could include financial institutions like banks, rent or utility arrears or personal credit arrangements such as store charge cards or personal online loans. There are different ways of going about declaring personal insolvency. It is not something that you should enter into lightly since it can have far-reaching consequences. It is not just an easy way out of paying back your short term loans. The advantage is that you can use this procedure to wipe out your debts and start with a clean slate.
Although everyone immediately thinks of bankruptcy when personal insolvency is mentioned, there are other alternatives. The types of insolvency will depend on your circumstances, how much you owe and to whom. The different types of personal insolvency are: Debt Management Plan (DMP), Debt Relief Order (DRO), Individual Voluntary Arrangement (IVA), Administration Order (AO) and finally declaring bankruptcy.
We will look at each of these procedures in turn. But for further information, you could contact the Citizens Advice, the Money Service or charities like the StepChange Debt Charity. They will all be able to give you more details to help you decide which is the best solution for you.
Different Types of Personal Insolvency
A Debt Management Plan is an informal agreement between you and your creditors to pay back non-priority debts such as credit cards, loans and store charge cards. A DMP provider will arrange the repayment plan. They receive a lump sum every month which they divide between your creditors. Some DMP providers will take a fee from this lump sum. But, many of the debt charities will do this service on your behalf for free.
The advantages are that it is easier for you to budget with a DMP and you will not be bothered by calls. However, paying off your debts may take longer. You will still incur interest charges and it could affect your credit record.
You are eligible for a Debt Relief Order if you are not a home-owner, have little spare cash and have debts of under £20,000. Qualifying debts for a DRO can be credit card debts, arrears with rent and utility bills as well as HP payments. You must pay a fee of £90, which goes to a DRO advisor or approved intermediary. But again, you should check to see if one of the debt charities or the Citizens Advice can do it on your behalf. When under a DRO you must return any HP goods. The order remains on your credit record for six years. Also, you cannot borrow more than £500 without informing the creditor of the DRO.
An Individual Voluntary Arrangement is a formal and legally-binding agreement set up by a qualified insolvency practitioner. The purpose of an IVVA to pay off both priority and non-priority debts. You are not eligible for an IVA unless your debts total more than £10,000 and you owe money to at least 2 creditors. An IVA is time-limited, which means you pay instalments for a set period, such as 5 years. It may mean that you don’t end up paying back all your debts, but at the end of the period all remaining debts are written off.
An IVA is quite pricey as the qualified insolvency practitioner takes about £4,000-£5,000 in instalments from your monthly payments. Some jobs, such as if you are accountant or solicitor, might be affected by an IVP. You could be debarred from your profession. To enter into an IVP, you must be relatively secure in your job. Otherwise, if your circumstances change, you might not be able to meet your financial obligations.
An Administration Order (AO) is a formal legally-binding agreement to pay off your debts. To be eligible, you must have no more than £5,000 in debts. One of your creditors must be the result of a county court or High Court judgement/fine. To apply for an AO, you fill in the application form N92 and take it to your local county court. You supply details of your debts. The court decides your monthly payments and how this should be allocated to your creditors. There is no up-front fee for an AO, but the courts will keep 10% of your monthly instalments to pay for their costs.
An AO is a composition order, which means you have a time limit, usually three years. After this, your remaining debts are written off. At the end of the AO, you can pay £15 for a certificate of satisfaction saying your AO has finished. You can use this to amend your credit file.
Since April 2016, it is easier and more simple to declaring yourself bankrupt in England and Wales. Instead of going through the courts, you can complete the form online at www.gov.uk/apply-for-bankruptcy. Alternatively, you can contact the Insolvency Service enquiry line on: 0300 678 0015. You pay a fee of £680 to declare bankruptcy. You can pay in instalments and might be able to get financial aid from charities like Turn 2 us. You should make sure you have sufficient cash for your day-to-day expenses before you apply because the bank will freeze your account once you declare bankruptcy.
The Official Receiver will arrange an interview with you. In this meeting, you will sell any of your assets to pay off your debts. Council Taxes is also part of your debts, even if the local council have not yet issued a summons. A bankruptcy lasts a year (the Official Receiver will inform you when it has finished) but it will affect your credit rating for six years.
Comparing Different Types of Insolevency
| Type of Insolvency | Amount of Debt | Cost of Using Insolvency | Time |
|---|---|---|---|
| Debt Relief Order | Less than £20,000 | £90 | Appears of credit file for 6 years |
| Individual Voluntary Arrangement | More than £10,000 and owe to more than 2 creditors | £4000-£5000 | Typically lasts 5 years |
| Administration Order | Less than £5000 and have a CCJ or High Court Fine | 10% of payments | 3 year time limit |
| Declaring Bankruptcy | N/A | £680 | 1 year plus 6 years on credit file |
Insolvency & Your Taxes
Since 2003, tax debts are no longer ‘special status.’ If you declare bankruptcy, they will also be cleared along with all your other debts. In the tax year when you declare bankruptcy, your PAYE code will be changed to NT. This means that you will not pay any tax in that tax year. If you start a new job or change jobs, your PAYE code reverts to normal.
What is the Insolvency Register?
Declaring insolvency can have an impact on your life for years. After a bankruptcy, your details are published in the Individual Insolvency Register. Your name remains on it for a year. This also applies if you take a Debt Relief Order. Your name will appear on the Register for the year of the DRO and a further three months afterwards. An Administration Order is kept on the Register of Judgements, Orders & Fines until the AO is paid off.
Your credit rating will be affected for six years. Some people do not consider this to be a serious deterrent. With the debts they had before the insolvency, their credit rating probably was very poor in the first place. A low credit rating also means you will find it difficult to access credit facilities and you will only be able to access loans for bad credit. For example, credit card providers may offer you harsh terms or conditions. This might include limited credit, high fees and high-interest rates. An alternative solution is to use a pre-paid credit card or a card secured against your savings account.
Bankruptcy in Young Families: Why is Insolvency Hitting them Harder?
There are some reasons why bankruptcy in young families is so common. We will consider the factors below: the financial cost of raising a child, not claiming benefits, changes and reforms in the benefit system, changes in working practices and the high cost of childcare. We will also look at the particular challenges faced by single parent households.
High Costs of Raising Children
The Money Charity has estimated that it costs an average of £30.23 per day to raise a child from birth to the age of 21. It is a major undertaking. Different challenges appear depending on the age of the child. In 2016 research, they found that becoming a parent increases the household’s likelihood of having debts by 50%.
Once the pregnancy is confirmed, a working woman must first decide whether she will continue working after the birth of the baby. This is a highly personal decision. There is no wrong or right answer since it depends on so many factors. However, from a purely financial point of view, going from being a dual-earning household to a single-income one can have a major impact. Disposable income is likely to reduce, and you might have to make sacrifices regarding purchases and lifestyle. Although working women are entitled to Statutory Maternity Pay or Maternity Allowance for a year after the birth of the baby, this still means a considerable drop in income.
Having a child changes people’s outlook. The Joseph Rowntree Foundation’s report ‘Falling Short: the experience of families below the Minimum Income Standard‘ looks at low-income families and how bankruptcy in young families affects this sector of society. The report shows that the lengths that people on a low income are willing to go so that their child does not experience lack. They may be able to make cuts in their personal expenditure. However, many accumulate debts at times like Christmas or birthdays since they do not want to deprive their child of anything.
Young Families Not Claiming Benefits
According to figures from the DWP, around £15 billion of benefits go unclaimed every year in the UK. Young families with children are one of the groups affected by this. They are the ones who are more likely to need an extra helping hand.
Working women have the guidance of their employer when it comes to making a claim for maternity payments. But, those claiming benefits because they are low income or unemployed are less likely to have help receiving everything they are entitled to, and may turn to expensive loans provided by UK payday lenders which can be very irresponsible if they can’t be paid back.
Here is a list of common benefits that young families are usualy eligible to;
- Income Support: Pregnant women are entitled to receive Income Support for 11 weeks before the birth of the baby until 15 weeks after (or until the child is 5 for single parents) if they do not receive other maternity payments. This payment is at least £57.90 per week depending on their circumstances and can help those struggling financially.
- Sure Start Maternity Grant: For those on certain benefits and with an only child under the age of 16, there is also the Sure Start Maternity Grant. This is a lump sum of £500. It allows parents to prepare for the birth of the child by buying the necessities like a cot, baby clothes, etc.
- Healthy Start food vouchers: Women on benefits who are at least ten weeks pregnant and children under 4 are eligible for the Healthy Start food vouchers. You can buy free milk, fruit, vegetables, infant formula and vitamins. Depending on the circumstances, they are worth £3.10-£6.20 per week.
Changes & Reforms in Welfare Provision
Since 2012, significant changes in welfare provision have hit low-income families particularly hard. There are three main changes responsible:
- The Benefit Cap: The benefit cap reduces the total amount of benefit a family can claim.
- Universal Credit: Universal Credit had made it easier for work practices like zero hour contracts to take a hold in the UK. Parents of young children are less likely to complain about their treatment and low pay. Benefits go some way towards making up the shortfall.
- The RSRS: The Reduction in the Spare Room Subsidy or Bedroom Tax (for those in social housing). Those in social housing have seen their Housing Benefit reduced by 14%-25%. This is especially true if they have an extra bedroom. Sometimes these families are unable to move because of a lack of alternative accommodation.
Childcare Costs
One of the major expenses causing bankruptcy in young families is, without a doubt, childcare costs. According to statistics from the Department of Education (2014), more than 1 in 4 families use grandparents to look after children. These families are extremely lucky to have a helping hand from families. One of the main reasons that women, get stuck in low-paying jobs is that it allows them to navigate the work-life balance.
Depending on where they live, a registered childminder can cost anything from £104-£148 per week. A part-time nursery for a child under two can cost £116-£158 per week. It is no wonder working mothers end up in low-paid jobs working unsocial hours. Some simply decide that it is not worth going out to work at all since most of their salary would pay for childcare costs.
It is only when the child is 3 or 4 that there is more affordable help. Schemes like the free early education pay for 15 hours per week for 38 weeks. However, there are still gaps in the provision for a mother who wishes to work full-time while also raising children.
Single Parents & Insolvency
According to the Office of National Statistics (ONS), there are 2 million single-parent households in the UK. They make up 25% of all families with dependent children. The Money Advice Research showed that 1 in 4 single parents (28%) have problems with debts. 44% of children in single-parent households live in relative poverty (compared to 24% of children living with both parents). Why are single parents so likely to struggle financially?
Part of the reason is that only 38% receive financial aid from the missing parent. So many are trying to cope on one salary. According to the ONS, 66.5% of single parents work. But, without help with childcare, they are more likely to get stuck in low-paid and part-time employment. They are also more likey to take on zero hour contracts. In a survey by the organisation Gingerbread, 31% of single mothers said they would work more hours if they had access to good quality childcare.
The reform in welfare provision has hit single-parent households more than any other family unit. The benefit cap affected more than 61% of single parents according to parliamentary research briefings (2016).
The ‘Debt Trap’ & Insolvency – Solutions
Most cases of bankruptcy in young families start with small debts. But, they can very quickly spiral out of control. This is particularly the case if there is an unexpected urgent need for money and they borrow from disreputable doorstep lenders. This leads to the ‘debt trap’, which is very difficult to escape.
The stigma of being in debt means that often these families are reluctant to seek help. Only 1 in 5 ask for financial advice in advance. By the time they do, matters are quite serious. There are many charities and organisations which are ready to help these people before it reaches the stage of insolvency.
Charities Help Avoid Bankruptcy in Young Families
The StepChange Debt Charity is available to help these people. Still, they emphasise that they will only assist those who can’t pay rather than those who won’t pay. Along with the Children’s Society, they believe in protecting children witnessing bailiffs and evictions and other common misfortunes resulting from bankruptcy in young families, which can cause psychological harm. In a survey conducted by the Children’s Society, 59% of children said that they worried about money.
Both organisations believe that there should be earlier and wider access to debt support and advice to help prevent bankruptcy in young families. They have also put forward the idea of a ‘breathing space’ scheme. This would be an extended period of protection from additional charges, further interest payments and enforcement action until young families can find a solution. They believe there should be a realistic timetable for debt repayment and in a manner to suit each family’s individual circumstances. Only in this way will we be able to decrease the amount of cases of bankruptcy in young families.
