Credit Card Firms Hit With Bankruptcy
Below is an article relating to credit and debt.
Card Companies Hit by Popular Bankruptcy Option
LONDON (Reuters) -People in financial difficulty are more likely to choose bankruptcy over voluntary arrangements, reducing the ability of credit card companies to recover bad debts, consultancy PriceWaterhouse Coopers says.
In its annual report on credit cards, PriceWaterhouse Coopers said recent changes to insolvency laws has made bankruptcy a more palatable option for those in severe financial difficulty.
"There is a danger that consumers will choose bankruptcy over schemes of arrangement, which could reduce future recovery rates on delinquent balances," said Richard Thompson, partner at PWC.
Thompson said that the number of bankruptcies rose by 29 percent in the three months after the new Enterprise Act legislation on personal insolvency came into force in April.
But before bankruptcy or any voluntary arrangement, many borrowers opt to juggle their debt.
Card holders are making use of balance transfer provisions and introductory rates to delay repaying their debts and avoid more stringent financial management.
"The widespread holding of multiple cards and the availability of balance transfers mean that consumers in financial difficulty can avoid delinquency in the short-term by transferring debts between various accounts," Thompson said.
"There is a possibility that recorded charge-offs may therefore become a lagging indicator," he added.
Household debt in Britain now stands at a record one trillion pounds, of which 60 billion pounds is held on credit cards. However, card providers say people in Britain manage their debt better compared to other Europeans.
APACS, the country's payments association, said that the number of people classed as "over-indebted" has remained steady between three and four percent, despite a high growth in card balances.
Paul Rodford, Head of Policy at APACS, said competition in the marketplace means many consumers are taking advantage of zero percent offers and thus multiple cardholding is increasing.
However, he remains upbeat about people's sense of financial responsibility.
A recent report showed that markets with a fairly liberal credit regime, such as the UK, have a lower proportion of over-indebted households than those where credit is harder to come by, such as Belgium and Germany.
PWC says that current charge-off rates the rate of bad debts being written off is about four percent per annum or 2.4 billion pounds.
Date: Nov. 04, 2004
Madeline Thomas
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