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Bankruptcies fall, but personal debt levels remain high

5 November 2010

In Brief:
The Insolvency Service has, today, published statistics showing insolvencies in the third quarter of 2010.

Statistics taken from insolvency.gov.uk. Click here to view in full.

FRP Advisory comments:

"We should not assume that the drop in individual bankruptcies by more than 7% on the previous quarter – and by a massive 24% on the corresponding quarter of last year – in England and Wales, as highlighted by the Insolvency Service, means that fewer people are struggling with debt following the recession. Alternatives to bankruptcy are becoming increasingly popular with creditors, who find that they are a better way to claim back money from debtors. As a result, nearly as many Individual Voluntary Arrangements (IVAs) have been entered into as bankruptcies (12,960 IVAs against 13,907 bankruptcy orders) and IVAs have increased by 4.6% on the corresponding quarter last year. The number of Debt Relief Orders, a cheaper alternative to bankruptcy for individuals with no assets and owing less than £15,000, has increased to 7,068 cases last quarter since they were launched in April 2009. This, in part, explains the large drop in the number of bankruptcies. Overall, the number of personal insolvencies has fallen by 3.7% on the same period a year ago.

Creditors generally treat bankruptcy as their least preferred option; indeed, local authorities and HM Revenue & Customs are petitioning for bankruptcy less frequently. In addition, more creditors are approving non-statutory ways for individuals to pay back their debts – such as debt management plans, which can be arranged between the debtor and lender usually through an intermediary. In addition in certain circumstances creditors are agreeing to waive some of an individual’s liability to them in order to try and recover the remaining balance directly from that individual, rather than facing an uncertain – and typically disappointing – outcome from a formal insolvency process.

Debtors are also agreeing to more long-term methods to pay creditors to avoid bankruptcy; some IVAs are being extended by creditors so that monthly payments have to be made by debtors for seven years rather than the usual five. While many debtors are paying down their debts, there are still plenty that are not, which is why the stock of total debt is not reducing.

However, even if individuals manage to avoid bankruptcy through entering into alternative debt solutions, they are still insolvent and will face years of struggling to repay their debts. For many it may actually make more sense to bite the bullet and declare themselves bankrupt, with a view to putting these problems behind them much more quickly. It is worrying that personal debt in the UK remains at record levels; figures from the Bank of England highlight that unsecured debt has reached £216 billion in the UK."

Charles Turner

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