Here’s a cautionary tale to borrow with sense
The causes of bankruptcy tell a cautionary tale.
Every year the Insolvency Service, the government body which administers bankruptcies, publishes a list of the top reasons people give for going bust.
For bankruptcy, the number one reason given by bankrupts was unemployment or loss of income (19 per cent).
Also up there are ‘‘adverse legal action’’ (12 per cent), as a result of having guaranteed a debt (11 per cent), relationship breakdown (8 per cent), excessive use of credit facilities (5 per cent) and ill health and a lack of medical insurance (5 per cent).
For people who entered the No Asset Procedure (debts below $40,000 and no or few assets), 43 per cent cited ‘‘unemployment or loss of income’’ as the primary cause of their insolvency, followed by excessive use of credit facilities (14 per cent) and ill health or absence of health insurance (13 per cent).
And the figures for the 12 months to the end of June last year show people have gone bankrupt for less than $10,000.
The lessons of these cautionary tales: First, don’t take debt lightly. People fail under it, so make sure it is worth it.
Second, bad things happen to indebted people. If you borrow money you owe it to yourself to ensure you can repay it whatever happens.
This means factoring in the cost of taking out credit insurance into your borrowing.
But be aware it can prove expensive. As far as I can see, this is the single most profitable form of insurance ever invented (possibly with the exception of Alien Abduction insurance, unless that was an urban myth).
It is especially important to take debt seriously if you have kids, though loading up with debt early in life for luxuries can have a big impact on your ability to own the roof that’s over your kids’ heads later in life.
Thirdly, given that debt is such a serious thing, many argue that there is ‘‘good debt’’ and ‘‘ bad debt’’.
Good debt being for appreciating assets like houses and student loans, bad debt for happy things like wide-screen TVs.
There’s a lot of truth in the good debt/bad debt folk wisdom, the mantra of borrowing to prosper.
But it is also a trite line. A large student debt incurred to pay for a weak qualification may turn out to be a poor reason to borrow and buying a car to get to work with debt can (depending on the car and the terms of the contract) be a sensible decision.
But without doubt debt is such a serious burden it should not be taken on for frivolities like magwheels, cosmetic surgery or fashionable clothes. Plus it means you over-pay for everything when you factor the interest cost in.
And the sad truth is that there are two groups of debtors – those who get indebted by choice and those who do so as a result of a family crisis which, because they are on low incomes and have no savings, makes it impossible to cope with without borrowing.
Some of the latter group have made poor choices but many are able budgeters who just don’t earn enough to pay for things like the car breaking down.
If you are in the first group of debtors, take on debt only after planning your exit out of it and your ‘‘disaster’’ plans for if something else goes wrong. If you are in the second group, seek help now.
Mercifully, bankruptcy and No Asset Procedures are rare.
In the year to the end of June 2012, 11 in every 10,000 people aged over 15 entered personal insolvency.
But just as each new cyclist’s death on the road is a warning for all of us to take extreme care to share the road safely, so each bankruptcy should be a reminder to borrow with sense.