Bankruptcy in Young Families: Are Young Families More Likely to Become Insolvent?

- by Becky Hall

According to the statistics of the Money Charity, 264 people a day declared insolvency or bankruptcy in the UK in 2016. This works out to one person every 5 minutes and 28 seconds. Of these, 38% were cases of bankruptcy in young families. First of all, we will analyse what this statistic about bankruptcy in young families means. We will also look at how to declare bankruptcy and the consequences for your financial life.

In the second part of this report, we will try to answer the questions; why is bankruptcy in young families more common that in other sectors of society? What/who is responsible for this trend and what solutions are there to help reduce bankruptcy in young families?

bankruptcy in young families - cashfloat

What is Insolvency?

Personal insolvency means that you are unable to pay your creditors the money which you owe them. Creditors could include financial institutions like banks, rent or utility arrears or personal credit arrangements such as store charge cards or personal online loans. There are different ways of going about declaring personal insolvency. It is not something that you should enter into lightly since it can have far-reaching consequences. It is not just an easy way out of paying back your short term loans. The advantage is that you can use this procedure to wipe out your debts and start with a clean slate.

Although everyone immediately thinks of bankruptcy when personal insolvency is mentioned, there are other alternatives. The types of insolvency will depend on your circumstances, how much you owe and to whom. The different types of personal insolvency are: Debt Management Plan (DMP), Debt Relief Order (DRO), Individual Voluntary Arrangement (IVA), Administration Order (AO) and finally declaring bankruptcy.

We will look at each of these procedures in turn. But for further information, you could contact the Citizens Advice, the Money Service or charities like the StepChange Debt Charity. They will all be able to give you more details to help you decide which is the best solution for you.

Different Types of Personal Insolvency

Comparing Different Types of Insolevency

Type of InsolvencyAmount of DebtCost of Using InsolvencyTime
Debt Relief OrderLess than £20,000£90Appears of credit file for 6 years
Individual Voluntary ArrangementMore than £10,000 and owe to more than 2 creditors£4000-£5000Typically lasts 5 years
Administration OrderLess than £5000 and have a CCJ or High Court Fine10% of payments3 year time limit
Declaring BankruptcyN/A£6801 year plus 6 years on credit file

Insolvency & Your Taxes

Since 2003, tax debts are no longer ‘special status.’ If you declare bankruptcy, they will also be cleared along with all your other debts. In the tax year when you declare bankruptcy, your PAYE code will be changed to NT. This means that you will not pay any tax in that tax year. If you start a new job or change jobs, your PAYE code reverts to normal.

What is the Insolvency Register?

Declaring insolvency can have an impact on your life for years. After a bankruptcy, your details are published in the Individual Insolvency Register. Your name remains on it for a year. This also applies if you take a Debt Relief Order. Your name will appear on the Register for the year of the DRO and a further three months afterwards. An Administration Order is kept on the Register of Judgements, Orders & Fines until the AO is paid off.

bankruptcy in young families- cashfloat

Your credit rating will be affected for six years. Some people do not consider this to be a serious deterrent. With the debts they had before the insolvency, their credit rating probably was very poor in the first place. A low credit rating also means you will find it difficult to access credit facilities and you will only be able to access loans for bad credit. For example, credit card providers may offer you harsh terms or conditions. This might include limited credit, high fees and high-interest rates. An alternative solution is to use a pre-paid credit card or a card secured against your savings account.

Bankruptcy in Young Families: Why is Insolvency Hitting them Harder?

There are some reasons why bankruptcy in young families is so common. We will consider the factors below: the financial cost of raising a child, not claiming benefits, changes and reforms in the benefit system, changes in working practices and the high cost of childcare. We will also look at the particular challenges faced by single parent households.

High Costs of Raising Children

The Money Charity has estimated that it costs an average of £30.23 per day to raise a child from birth to the age of 21. It is a major undertaking. Different challenges appear depending on the age of the child. In 2016 research, they found that becoming a parent increases the household’s likelihood of having debts by 50%.

bankruptcy in young families- cashfloat

Once the pregnancy is confirmed, a working woman must first decide whether she will continue working after the birth of the baby. This is a highly personal decision. There is no wrong or right answer since it depends on so many factors. However, from a purely financial point of view, going from being a dual-earning household to a single-income one can have a major impact. Disposable income is likely to reduce, and you might have to make sacrifices regarding purchases and lifestyle. Although working women are entitled to Statutory Maternity Pay or Maternity Allowance for a year after the birth of the baby, this still means a considerable drop in income.

Having a child changes people’s outlook. The Joseph Rowntree Foundation’s report ‘Falling Short: the experience of families below the Minimum Income Standard looks at low-income families and how bankruptcy in young families affects this sector of society. The report shows that the lengths that people on a low income are willing to go so that their child does not experience lack. They may be able to make cuts in their personal expenditure. However, many accumulate debts at times like Christmas or birthdays since they do not want to deprive their child of anything.

Young Families Not Claiming Benefits

bankruptcy in young families- cashfloat

According to figures from the DWP, around £15 billion of benefits go unclaimed every year in the UK. Young families with children are one of the groups affected by this. They are the ones who are more likely to need an extra helping hand.

Working women have the guidance of their employer when it comes to making a claim for maternity payments. But, those claiming benefits because they are low income or unemployed are less likely to have help receiving everything they are entitled to, and may turn to expensive loans provided by UK payday lenders which can be very irresponsible if they can’t be paid back.

Here is a list of common benefits that young families are usualy eligible to;

  • Income Support: Pregnant women are entitled to receive Income Support for 11 weeks before the birth of the baby until 15 weeks after (or until the child is 5 for single parents) if they do not receive other maternity payments. This payment is at least £57.90 per week depending on their circumstances and can help those struggling financially.
  • Sure Start Maternity Grant: For those on certain benefits and with an only child under the age of 16, there is also the Sure Start Maternity Grant. This is a lump sum of £500. It allows parents to prepare for the birth of the child by buying the necessities like a cot, baby clothes, etc.
  • Healthy Start food vouchers: Women on benefits who are at least ten weeks pregnant and children under 4 are eligible for the Healthy Start food vouchers. You can buy free milk, fruit, vegetables, infant formula and vitamins. Depending on the circumstances, they are worth £3.10-£6.20 per week.

Changes & Reforms in Welfare Provision

Since 2012, significant changes in welfare provision have hit low-income families particularly hard. There are three main changes responsible:

  1. The Benefit Cap: The benefit cap reduces the total amount of benefit a family can claim.
  2. Universal Credit: Universal Credit had made it easier for work practices like zero hour contracts to take a hold in the UK. Parents of young children are less likely to complain about their treatment and low pay. Benefits go some way towards making up the shortfall.
  3. The RSRS: The Reduction in the Spare Room Subsidy or Bedroom Tax (for those in social housing). Those in social housing have seen their Housing Benefit reduced by 14%-25%. This is especially true if they have an extra bedroom. Sometimes these families are unable to move because of a lack of alternative accommodation.

Childcare Costs

bankruptcy in young families- cashfloat

One of the major expenses causing bankruptcy in young families is, without a doubt, childcare costs. According to statistics from the Department of Education (2014), more than 1 in 4 families use grandparents to look after children. These families are extremely lucky to have a helping hand from families. One of the main reasons that women, get stuck in low-paying jobs is that it allows them to navigate the work-life balance.

Depending on where they live, a registered childminder can cost anything from £104-£148 per week. A part-time nursery for a child under two can cost £116-£158 per week. It is no wonder working mothers end up in low-paid jobs working unsocial hours. Some simply decide that it is not worth going out to work at all since most of their salary would pay for childcare costs.

It is only when the child is 3 or 4 that there is more affordable help. Schemes like the free early education pay for 15 hours per week for 38 weeks. However, there are still gaps in the provision for a mother who wishes to work full-time while also raising children.

Single Parents & Insolvency

bankruptcy in young families- cashfloat

According to the Office of National Statistics (ONS), there are 2 million single-parent households in the UK. They make up 25% of all families with dependent children. The Money Advice Research showed that 1 in 4 single parents (28%) have problems with debts. 44% of children in single-parent households live in relative poverty (compared to 24% of children living with both parents). Why are single parents so likely to struggle financially?

Part of the reason is that only 38% receive financial aid from the missing parent. So many are trying to cope on one salary. According to the ONS, 66.5% of single parents work. But, without help with childcare, they are more likely to get stuck in low-paid and part-time employment. They are also more likey to take on zero hour contracts. In a survey by the organisation Gingerbread, 31% of single mothers said they would work more hours if they had access to good quality childcare.

The reform in welfare provision has hit single-parent households more than any other family unit. The benefit cap affected more than 61% of single parents according to parliamentary research briefings (2016).

The ‘Debt Trap’ & Insolvency – Solutions

Most cases of bankruptcy in young families start with small debts. But, they can very quickly spiral out of control. This is particularly the case if there is an unexpected urgent need for money and they borrow from disreputable doorstep lenders. This leads to the ‘debt trap’, which is very difficult to escape.

The stigma of being in debt means that often these families are reluctant to seek help. Only 1 in 5 ask for financial advice in advance. By the time they do, matters are quite serious. There are many charities and organisations which are ready to help these people before it reaches the stage of insolvency.

Charities Help Avoid Bankruptcy in Young Families

The StepChange Debt Charity is available to help these people. Still, they emphasise that they will only assist those who can’t pay rather than those who won’t pay. Along with the Children’s Society, they believe in protecting children witnessing bailiffs and evictions and other common misfortunes resulting from bankruptcy in young families, which can cause psychological harm. In a survey conducted by the Children’s Society, 59% of children said that they worried about money.

Both organisations believe that there should be earlier and wider access to debt support and advice to help prevent bankruptcy in young families. They have also put forward the idea of a ‘breathing space’ scheme. This would be an extended period of protection from additional charges, further interest payments and enforcement action until young families can find a solution. They believe there should be a realistic timetable for debt repayment and in a manner to suit each family’s individual circumstances. Only in this way will we be able to decrease the amount of cases of bankruptcy in young families.

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About The Author
Becky Hall
Becky never thought she would be a financial blogger. But Fate arranged that Becky had to put her accounting degree on the back burner right after she graduated with a first in Business and Accounting. While doing bookkeeping as a freelancer for private clients, Becky noticed how many cashflow problems can be solved with a little bit of education. Trying to keep her clients out of debt, Becky began writing resources which she distributed to clients. What began as writing advice for clients evolved into a passion and now Becky found her platform at Cashfloat. When she isn’t writing, calculating or budgeting, Becky can be found at her piano playing something classical.
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