Payment freezes on personal loans are masking the true nature of deteriorating personal finances, an insolvency expert has warned.
Analysis by debt industry data company TDX Group found the volume of individual voluntary arrangements (IVAs) and trust deeds decreased by 39 per cent between the first and second quarter of 2020 and is down 38 per cent annually.
However, David Heathcote, personal insolvency expert at TDX Group, is predicting a steep rise in the fourth quarter and next year as borrowers come off payment holidays.
“Unfortunately, this trend is mainly due to the temporary relief of forbearance, and a truer picture will emerge with an expected steep rise in personal insolvencies towards the end of the year,” he said.
“The financial shock of Covid-19 means the UK economy is heading for a sharp recession, with an estimated 10 per cent contraction this year.
“The government furlough scheme and support measures such as emergency payment freezes, though much needed, are masking the true landscape of deteriorating personal finances, and may create a bottleneck in personal insolvencies in the fourth quarter.”
He said workers from industries badly affected by the pandemic, such as retail, leisure and tourism who would normally be eligible for an IVA are being advised to hold fire for full visibility on their job security.
“During this period of financial uncertainty, it’s difficult for people to commit to fulfil the full payment obligation term for an IVA, which is often five years,” he said.
“As furlough and self-employment schemes, as well as payment freezes on mortgages, credit cards and utilities end in the fourth quarter, the UK will face another surge of consumers entering financial difficulties.
“New personal insolvency volumes could rise rapidly, a trend that will likely persist into 2021.
“In this environment, insolvency companies must prepare for extra capacity and ensure they treat consumers with compassion and flexibility.”
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