Government plans radical shake-up of insolvency laws

As last month's credit card bills and banks statements being to arrive and consumers wake up to the reality of their overspending, new government plans to shake up insolvency laws look set to make live a little easier for the indebted and potentially much harder for their creditors.

Under plans outlined in a consultation paper published by the Ministry of Justice yesterday, consumers with multiple debts who suddenly find themselves in changed circumstances for example, due to divorce or redundancy - could be granted temporary relief' from enforcement or collection.

Consumers would be able to go to court for an Enforcement Restriction Order' which would allow them to stop making payments on debts including personal loans and credit cards amounting to £15,000 for up to a year. The current consultation will establish which payments will and won't be covered, but child support payments, student loans and mortgage repayments will certainly belong to the latter category, as might utility bills, rent and council tax. This does make us wonder exactly what they do cover but let's get to that in a moment.

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Civil Justice Minister Bridget Prentice told The Times that the Government did not intend for the ERO to be regarded as an interest holiday'. The new proposals are instead aimed at helping those who genuinely can't pay and are looking for a way to manage their debts effectively.'

This is all very laudable. It might help prevent people from falling into a downward spiral of missed payments and rising charges as people often find out the hard way, although all the personal finance articles tell you to get in touch with your lender as soon as you run into trouble so you can plan ahead, it doesn't always mean you'll get a sympathetic hearing.

While people do have to take personal responsibility for their debts, it does seem counter-productive to come down hard on someone who may just need a bit of time to get back on their feet after redundancy or divorce.

Unfortunately of course and this always happens once the bubble bursts this kind of legislation is coming at a time when creditors need it least. As John Stepek wrote in Monday's Money Morning (Britain's subprime problem is bigger than you think), credit card companies including Capital One and the more upmarket American Express are already beginning to falter due to rising bad debts, plus falling retail sales.

If they and all the retailers who also offer credit find that consumers are allowed to stop their payments for a year, and avoid paying any penalty on that period, their profits will come under even more pressure. No one's likely to be shedding tears for the credit card companies when they're lined up against broken-hearted divorcees. But if the card providers start to lose enough money, they'll start laying people off too effectively shifting the cost of one individual's debt problem onto another.

On top of this, if you look at the type of debt that actually will be covered by these EROs, then it falls distinctly into the discretionary spending' category. You still have to pay your housing costs, energy costs, and any money you owe the government, basically, in the form of student loans, fines or council tax. So what exactly is left? That new sofa, holiday or car that you bought in the good old days before the credit crunch, perhaps.

So retailers and credit card companies can take the pain, but the government has no intention of letting its debtors off the hook. But then, Gordon Brown really does need the money these days.