Besides, sometimes you have to take a step backward to move forward. The most practical way of dealing with bankruptcy and moving back to solvency is by establishing a saving plan. Saving is an essential aspect of wealth creation. With the right mindset and correct information, individuals can create wealth post-bankruptcy by adopting and neglecting certain behaviors.
Take Advantage of the Pre-discharge Credit Counseling
Bankruptcy comes with a lot of emotional and psychological strain. However, getting help from credit counselors can help you get through. Involving your legal advisor will help you find an approved agency to counsel you through the process. The counseling platform offers valuable financial advice to help you wisely manage your finances in future. It also focuses on income, expenses and strategies to save. Consequently, it covers financial literacy on budgeting and debt management. Budgeting your finances is essential if you want to achieve your saving goals. During bankruptcy, individuals learn to live without credit. Therefore, this experience should be used to your advantage by trying to operate with no debt post-bankruptcy. In case you access credit-cards, it is essential that payments be made before or on dates when they are due.
Increase Your Income Streams
After being declared bankrupt, sourcing for new income streams may be difficult at first. However, individuals can work with what they have, to achieve what they hope to get. For example, monthly income paid to unsecured creditors before being declared bankrupt can help you build up on your savings by depositing it into your savings account. Individuals can also start a business. Not all business ventures require capital to start. For example, Dave Ramsey began a financial advice group in his church after he was declared bankrupt which later became the successful Ramsey Show. Using your experience to educate others can create business opportunities for you, and you can even document your experience by writing a book. You can also take up a second job and save income from that job.
Work on Improving Your Credit History
Although debt is the last thing, you should think about post-bankruptcy, working on developing a good credit history is essential. Bankruptcy records show on your credit score for up to seven years. However, improving your credit scores in three years could make you qualified for a loan. Lenders often look at payment history, hence having years of consistent payments to your savings account shows reliability and commitment. Consequently, a good credit history improves your credit score allowing you to qualify for loans with lower interest rates which also makes it easier for you to save.
Dealing with bankruptcy can be exhausting. However, accepting and working towards financial stability can make it bearable. Personal financial evaluation can help you know where to start on your journey towards normalcy. Adopting better financial habits like living within your means is also good to ensure you remain financially stable.
With the 10th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.
Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.
As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.
Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.
Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.
Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”
The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.
If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.
In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.
A series of high-profile collapses and CVAs in recent months are clear signs of the challenging conditions currently facing the UK High Street. While many retailers are facing falling sales and increased overheads, it is the stores that fail to adapt to changing consumer habits, such as Toys R Us, which end up paying the price.
By putting a strong business strategy in place to harness the growth potential of e-commerce channels, retailers can mitigate the risks posed by their rising cost base and stay ahead of competitors in this fast-moving industry.
Increased consumer caution, food price inflation and wage stagnation have all contributed to High Street incomes being squeezed. Factors such as the increased National Living Wage and minimum pension contributions, when combined with the introduction of the apprenticeship levy and higher business and property rates mean that many retailers are facing higher overheads than ever before.
The growth of the ‘bricks-to-clicks’ phenomenon has been accelerated by the rise of the ‘on-demand economy’, with consumers less willing to wait to get their hands on goods and more online retailers offering same-day delivery. Developments in technology have also streamlined the online shopping experience, with processes such as returns now easier than ever before. As a result of these changes, it is no surprise that footfall on the High Street is falling, with many shoppers choosing to avoid the crowds and find products at a competitive price online.
With consumer habits changing rapidly, it is essential that retailers build their business models accordingly. Toys R Us is a prime example of a chain which failed to move with the times. As well as relying on large, highly-stocked warehouses, which proved costly to run, it failed to invest in the development of an effective online sales channel with expedited shipping options. Securing access to customer data, via methods such as targeted marketing, will allow retail businesses to adapt quickly to new trends before they are able to have a negative impact on sales.
A number of retailers, including Mothercare, have recently announced an intention to secure a company voluntary arrangement (CVA), which could allow them to restructure their finances and agree voluntary repayment schemes with creditors on a one-to-one basis. Helping the business to continue trading and the existing management team to retain control during negotiations with creditors, this route is often viewed as a more attractive option than pre-pack and other types of administration. However, large numbers of empty stores could have the effect of driving more consumers online, away from the High Street, as well as increasing the likelihood that local councils will try to raise business rates to account for the potential shortfall in payments.
Taking action at an early stage to negotiate shorter leases with landlords could enable retailers to cut costs. Additionally, allowing companies to take advantage of the most profitable times in the retail calendar and hire staff only when needed, pop-up stores could reduce costs and increase flexibility.
Consumers are increasingly treating bricks-and-mortar stores as ‘showrooms’, allowing products to be viewed first-hand before finding them online. With this in mind, retailers should employ a joined-up approach, with on and offline sales channels. If businesses are going to encourage repeat business and meet consumer expectations in the future, simply offering a website is no longer enough. It must complement or even enhance the in-store experience, whilst reflecting the brand identity and being quick and easy to navigate. For example, we may see more customers venturing into stores for product advice, supporting the overall decision-making process, before carrying out their transactions online.
As e-commerce delivery slots become shorter and shorter, it is increasingly important for High Street retailers to have a strong logistics network in place, especially around Christmas and other key times in the retail calendar. Locating reliable local suppliers could also help to ensure supply chain agility, facilitating short lead times whilst allowing stores to vary their purchases depending on what is selling well.
While there is no doubt that these are challenging times for retailers, physical stores will continue to play an important role as part of the consumer buying process. For this reason, the High Street is unlikely to disappear completely. By heeding shifting consumer habits and adapting their business model accordingly, retailers can stay ahead of the curve and secure their position in the High Street for many years to come.
At the end of Q2 2016, the Insolvency Service estimated that 3,617 corporate and SME companies entered insolvency, a number that is 2.7 % lower than the same period in 2015. For personal bankruptcies, the estimate is that 3,537 bankruptcy orders were granted which is 11.2 % lower than the same period in 2015 and the lowest since Q3 1990.
However, unlike the corporate and SME sectors, total personal insolvency, including bankruptcy filings, Debt Relief Orders (DRO) and Individual Voluntary Arrangements (IVA), was up 22.4 % from Q2 2015. The lower personal bankruptcy filings were offset by higher DROs, which were 15.6 % higher in Q2 2016 versus Q2 2015, and IVAs which were 42.7 % higher in Q2 2016 than in Q2 2015.
To tell us more about trends within consumer and SME insolvencies in the UK and the implications for credit grantors, Finance Monthly interviewed Andrew Berardi – PRA Group Europe’s Managing Director for UK Insolvency Investment Services.
Why have corporate and SME insolvencies fallen?
One needs to dig deeper into the corporate insolvency figures to find possible clues. For instance, one statistic shows that Compulsory Liquidations, where a credit grantor pushes the company into a bankruptcy or winding up order, decreased by 14 % between Q2 2015 and Q2 2016. Also, total company liquidations stand at the lowest since comparable records began in 1984. It is clear from the figures that credit grantors are giving their corporate and SME clients “breathing space” and in some instances, providing a life line by re-writing loans, finding additional financing, and even forgiving some loan principal.
The resurgence of Private Equity after the financial crisis has also provided a lifeline to struggling entities through funds designed specifically to invest in turnaround situations. The Insolvency Service website in the UK also publishes interesting statistics regarding insolvency by specific industry types; construction and retail/wholesale trade seem to have the highest incidents of insolvency proceedings.
A final statistic, and one not included in the official corporate insolvency statistics, is that companies entering liquidation after administration have risen by 33 % from Q2 2015 to Q2 2016. As trading conditions get tougher, this could be a harbinger for a rise in future corporate and SME insolvency proceedings.
What is driving the changes in personal insolvency filings in the UK?
Despite the fall in personal bankruptcy filings, overall consumer insolvency filings are on the rise. The statistics show that the fall in bankruptcy filings is confluent with the rise in DRO filings. In October 2015, the DRO protocol was relaxed so that consumers with £20k in debt (£15k in the previous DRO protocol) and £1k in asset (£300 in the previous DRO protocol) could access the DRO protocol. The relaxing of these guidelines has resulted in greater access to the DRO protocol for a population of consumers who may have otherwise had to petition for a bankruptcy as their only viable debt forgiveness option.
However, the causes for the rise in IVA filings are less certain. Evidence suggests that the IVA protocol has been marketed to a broader range of consumers who are now aware of the many benefits of an IVA as compared to other forms of debt forgiveness arrangements. Additionally, changes in the regulatory landscape may mean consumers are being directed away from unregulated Debt Management Plans (not considered insolvency) and increasingly advised to consider a regulated debt forgiveness scheme such as IVAs. Regardless, the increase in IVAs cannot be ignored.
What should credit grantors do to maximize recoveries on credit products defaulted due to insolvency?
Recoveries on insolvency proceedings can be lengthy and unpredictable, and in the case of DROs, credit grantors should not expect any recovery. Whether your customer is an SME or consumer, it is important for credit grantors to engage in the process by:
- Engaging with the insolvency practitioner, bankruptcy trustee, or administrator appointed to the case.
- Processing and responding to the paperwork in a timely and accurate manner.
- Lodging your proof of debt along with supporting documentation such as statements, invoices, etc. where and when requested.
There are specialist service providers who can assist your department with these tasks for a fee. Another way to maximize recoveries may be to sell the insolvencies to an FCA regulated specialist debt purchaser such as PRA Group.
How can PRA Group assist UK credit grantors to maximise their recoveries from SME and Consumer insolvencies?
As a highly respected and recognised global leader in the purchase of nonperforming personal and SME credit products, PRA is also one of the industry leaders in purchasing many types of consumer and SME insolvencies including IVAs; CVAs – an IVA for SMEs; Trust Deeds – the Scottish equivalent to an IVA; and bankruptcies.
With insolvency purchasing capabilities in the UK, Germany, U.S., and Canada, there is a good chance your organization can benefit from PRA’s insolvent debt purchasing expertise. Our insolvency team consists of industry veterans who are highly regarded for their ability to structure debt purchase solutions that are customised, compliant, and transparent.
What are the key considerations to make when managing acquisition of bankrupt and insolvent consumer debt? What are the most common challenges that you are faced with?
Sellers of insolvent consumer debt should be clear on the internal strategic purpose for selling insolvent debt. As indicated above, insolvency proceedings can be administratively burdensome for an internal recovery operation and therefore many sellers like the idea of a “forward flow” whereby the buyer assumes the administrative responsibility of managing the insolvency. Some sellers simply prefer to enter into periodic “spot sales” to fill a recovery gap or accelerate the recovery from the insolvency. In being clear on the strategic purpose, PRA can then structure a purchase solution right for the Seller. Another common challenge we have as a buyer of insolvent debt is the quality of the data. Certain insolvency-specific data (such and insolvency start date and insolvency type) is important to ensure the best price. Given PRA’s extensive experience with these debt types, we are often able to supplement seller data through our data warehouses, which ensures the best possible price for the seller.
As a thought leader in this segment, how are you developing new strategies and ways to help your clients?
We are very much an active participant within the insolvency industry, which, in my opinion, assists everyone in the insolvency chain. Throughout the regions we operate, PRA maintains strong working relationships with Trustees, Practitioners, regulators, creditor liaisons, and consumer advocacy groups. In the UK, PRA maintains representation on the standing IVA working committee. In the US, we have implemented a hybrid “service to buy” solution, which gives sellers the best of both solutions.
Career Highlights
- In 1993, Andrew joined Bear Stearns Companies Inc. to help establish and grow a first ever debt purchasing platform for consumer insolvencies in the United States.
- In 2003, while still with Bear Stearns, Andrew moved from New York to London to build and grow a first ever debt purchasing platform for consumer insolvencies in the United Kingdom.
- In 2014, Andrew joined the PRA Group after a 5 year period working with a boutique investment advisor where he established the first ever Private Equity style fund dedicated exclusively to the purchase of consumer insolvencies in the UK.
Food for Thought
What would be your top 3 tips for going the extra mile?
- Be as clear as possible regarding objectives and the desired outcomes
- Surround yourself with talented people and give them guidance and autonomy
- Endeavour to be two steps ahead of the competition
What does a typical day in the office look like for you?
At some point, one’s career evolves to where there is no typical day in the office. However, every good day involves some combination of strategic dialogue, data analysis, and client centric activity … all in the same day.
What inspires you to press further into your work?
Mentoring younger people who are passionate about building the business and building their career within PRA Group. I very much enjoy meeting our clients and ensuring the business is doing everything it can to meet their needs. Last, but not least, I enjoy one on one meetings with Insolvency and Turnaround professionals who are passionate about rescuing small business, and, for those practicing on the personal insolvency side, passionate about helping consumers to resolve their debt problems and move forward with their lives.
Email: Andrew.berardi@pragroup.co.uk
Andrew always has plenty of time to speak to those who have a shared interest in trends within the insolvency market or wish to better understand PRA’s debt purchase capabilities.
