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Creditors forced to call time on “Zombie” borrowers

Proportion of bankruptcy orders initiated by creditors has leapt 52%  

The proportion of bankruptcy orders initiated by creditors against individuals has jumped by a half in the last two years.  

The percentage of bankruptcy orders initiated by creditors reached 21% of all bankruptcy orders in Q3 2011, up from 13.8% in Q2 2009.  

The increase in creditors’ petitions is less an indication of hardening attitudes towards debtors and more a recognition that a growing group of borrowers cannot keep up with the minimum payments needed to service their debts.  

Damon Watt, Head of our Insolvency & Restructuring team, says: “A persistently high unemployment rate means that more and more people have burnt through their savings and have no way of servicing their debt. Even those who do have jobs have been hit by rising inflation and stagnating wages.”  

“The Eurozone crisis has acted as a catalyst and forced some consumer credit providers to reassess whether certain creditors are going to get their finances back on track within a sensible timeframe.”  

“Creditors have been very lenient but some now, finally, being forced to call time on zombie borrowers.”  

Zombie borrowers are those who are barely making repayments or those who can only service their interest or reduced interest payments and have little prospect of being able to repay the principal element of their debt.  Zombie borrowers are those who are being kept “barely alive” by virtue of the current low interest rates.  

Although the overall number of bankruptcy orders involving individuals has decreased by 14% from 11,100 in Q2 2011 to 9,600 in Q3 2011, the number initiated by creditors have bucked the trend, increasing by 7% from 1,900 in Q2 2011 to 2,000 in Q3 2011.  

Damon Watt says: “It is diverse group of consumer credit providers that are being forced to launch these creditors’ petitions and include retailers, credit card suppliers, utility companies and even local authorities who are owed council tax.”  

“HM Revenue & Customs is probably the most high profile example of a Government body that is said to be taking a tougher line with creditors by bringing in external debt collection agencies.”  

Damon Watt comments: “Creditors may have been hoping that a swifter economic recovery could boost personal incomes, but this has not happened. Credit providers realise that waiting longer will actually decrease the probability of them being able to recoup any costs.”  

“Unprecedented low interest rates have been a life raft for over indebted households but the Eurozone crisis has led to an increase in borrowing costs for banks themselves which they may be forced to pass on to borrowers. Over the longer term the threat of a Bank of England interest rate rise remains.”  

“It has come to a point where creditors are realising that some of their debtors will not be able to get back on track and this has spurred them into action.”