The increase to the cost of living and the impact on debt recovery

From 1 April 2022, millions of people in the UK became affected by significant escalation in energy rises which is likely to increase energy bills for the average household by at least £690 per year. The energy cap has gone and further significant upsurges are expected in October 2022. This is in addition to council tax and water bills rising from 1 April 2022.

Food and clothing have also seen significant escalation in pricing and interest rate increases could negatively impact mortgages. Despite the marked increase to the cost of living, individuals’ salaries are failing to keep up with inflation.

More recently, the invasion by Russia into Ukraine will have a significant impact on food prices. The UN Food and Agriculture Organisation has warned that the war threatens the global supply of key staple crops.

The increase in the cost of living and the significant rise in inflation has the potential to have an adverse impact on debt recovery. However, taking proactive steps to tackle bad debt (as a creditor) and to resolve unpaid debt issues (as a debtor) can facilitate a swift resolution to solving problems without court intervention.

In this article, our Commercial Recoveries team take a look at the impact of mounting debts from both a debtor and creditor perspective.

The impact on debt recovery

The current economic factors are likely to significantly affect mounting debt and the creditors’ ability to recover debt.

From the debtor’s perspective

  • Increases to cost of living will place more pressure on debtors due to the growing home and business costs.
  • Debtors may seek further funding to manage amplified levels of debt.
  • Forced insolvency proceedings – these are already on the rise - in Q4 of 2021, the number of insolvencies was 18% higher than in Q3 2021 and 51% higher than in Q4 2020 (as COVID-19 restrictions preventing company liquidations ceased on 1 October 2021) .
  • With litigation comes increased costs. The longer the debtor does not repay the monies owed and if the creditor is pursuing litigation to recover what they are owed, the more debt will be incurred through court costs and interest. As interest rises daily, this will add more pressure.
  • Often, debtor’s failing to engage and tackling debt problems head on increases liability.

Creditor’s perspective

  • With less funds available, it will be more difficult to collect payment from some debtors.
  • Courts may be unwilling to force debtors into payment plans if no funds are available and, existing arrangements could fall into arrears.
  • The prospect of recovery will be less likely than previously against some debtors.

What should the debtor do?

  • Debtors should not attempt to ignore the debt. As highlighted, this will only intensify the amount of debt owed.
  • Attempt to negotiate reasonable monthly payments as soon as possible in order to help manage financial problems. Agreeing monthly instalments will help to prevent the debt from growing and will allow debtors to manage cashflow.
  • Moreover, agreeing a payment plan soon will likely mean that creditors will not keep pursuing litigation and help to prevent the debt from rising.

What should the creditor do?

  • Creditors ought to act quickly to make a recovery.
  • Consider other options such as negotiating a payment plan with the debtor as soon as possible in order to limit an upsurge in bad debt. The longer creditors wait to recover a debt, the likelihood of recovery will decrease.
Whilst the increased cost of living will have an impact on debt recovery, this does not mean that debts should be ignored. Bad debts can significantly impact upon the creditor’s cashflow.


We believe that creditors and debtors engaging in a positive dialogue often helps to find a workable resolution for both. Taking action to resolve disputes as quickly as possible helps to establish whether there is scope to recover, and if so, whether instalment plans or charges on property are viable alternatives. In some circumstances, it will also help to preserve future relationships.

Read other items in the Commercial Brief - May 2022

Related item: Commercial recoveries and enforcement: how the change in UK enforcement rules may affect you and your business this autumn

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