Monday, 5 May 2008
Personal insolvencies - 100,000 a year
The government has just published data on last year's personal insolvencies. Overall, the numbers filing for bankruptcy appear to have stabilized at just over 100,000 a year; roughly the same level as 2006. It is still a huge number, and reflects the deeply distressed financial situation of many UK households.
Filing for bankruptcy is a miserable experience. Nevertheless, it is hard to feel sorry for insolvent individuals. The vast majority of bankrupt individuals brought this misery upon themselves, taking out credits that they could not repay. No one is forced to go into a bank and sign up for loan or a mortgage. It only takes a sharp pair of scissors to cut up a credit card. However, many bankrupt individuals have families, who are often the innocent victims of irresponsible debt accumulation.
Why do the banks, who own the majority of defaulted debts, put up with such losses? For them, it is a simple numbers game. The losses from a 100,000 deliquents can be written off against taxes and covered by large profits generated by other household debtors.
Here is a simple idea to limit personal insolvencies. In future, banks should not be able write off debts from individuals against tax payments. Since the costs of reckless lending would increase, Banks would have to be much more careful in the future about extending credit to vulnerable and financially naive individuals. Personal bankruptcies would fall, and the misery inflicted on the dependents of bankrupts would be reduced.
The government would never consider such a radical and effective proposal. For the government, a 100,000 bankruptcies a year is the acceptable cost of an explosion of household debt. The banks, too, seem content with that level of personal insolvencies.
So, the debt cycle will roll on. Irresponsible banks will continue to lend to naive financially illiterate individuals, and a sizable minority will default. The banks will foreclose and the UK will continue to produce a 100,000 personal bankruptcies a year.