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Personal Insolvencies Increase, but Not as Much as Expected

Written by on 8 July, 2009

Leading business advisor, PriceWaterhouseCoopers (PWC), reported that Britain is broke and that personal insolvency levels are on the increase.

Figures released by the Insolvency Service in February 2009 showed that a total of 67,428 people were declared bankrupt and a further 39,116 entered Individual Voluntary Arrangements (IVA) during 2008. This meant that a total of 106,544 people in the United Kingdom became insolvent.

Whilst these numbers were high, cumulative insolvency levels were still lower than in either 2006 or 2007. PWC reported that whilst IVAs had reduced in number, levels of bankruptcy had increased to their highest level ever. A number of financial experts were predicting both IVAs and bankruptcy would exceed 130,000 at the end of 2008, but this did not happen.

It has been suggested that the main reason that the number of IVAs did not reach the expected figure is due to an increase in the number of people taking out a second mortgage on their family home. Secured loans cannot be included in an Individual Voluntary Arrangement as the creditor has collateral. An increase in secured debt and falling property prices has led to higher levels of house repossession.

According to the Financial Services Authority (FSA), in excess of 13,000 homes were repossessed in the final quarter of 2008. The Council of Mortgage Lenders (CML) believes that as many as 500,000 homes will fall into negative equity over the course of 2009.

The Individual Voluntary Arrangement is dependent on one stable income within the household. The global economic downturn has led to rising unemployment, so this could also be a factor in a lower amount of IVA approvals. Should the terms of an IVA be defaulted on, a debtor can be declared bankrupt by the Insolvency Practitioner.

The Debt Relief Order (DRO) was introduced by the government on the 6th April 2009 to help those on very modest incomes. It will help consumers with assets of less than £300 (gross value) and a disposable income of under £50 per month. A DRO will assist a consumer who owes less than £15,000.

The Insolvency Service stated that 11% of current bankruptcy cases would have qualified for a Debt Relief Order. They believe that there will be a minimum of 14,000 cases per year.

As £15,000 is the bare minimum for an Individual Voluntary Arrangement, it is unlikely the introduction of the DRO will affect the popularity or otherwise of the IVA agreement. It is thought that fewer people will enter Debt Management Plans (DMPs) however, as these non-binding agreements are normally taken out to help consumers who are struggling with more modest levels of personal debt.

As a debt solution, IVAs still allow a consumer to keep the family home as well as avoiding publicity. An IVA is often considered a more beneficial route than bankruptcy for both creditors and consumers, as declaring bankruptcy will normally result in a debtor losing their assets and the creditor also stands little chance in recuperating the debt.

Useful links: Debt Consolidation

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