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UK insolvency at record levels

Monday 8th February 2010

Figures released on Friday by the Government’s Insolvency Service revealed that levels of personal insolvency in the UK have increased for the eighth consecutive quarter to sit at the highest levels since records began.

This year 134,142 people entered into personal insolvency which is in line with many forecasts and shows that as the UK economy comes out of recession, the UK consumer continues to struggle with personal debt and will do for some time yet.

The figures show that 17,007 individuals were made bankrupt this quarter, 13,219 entered into Individual Voluntary Arrangements (IVAs) and 5,348 Debt Relief Orders ('DRO'), the new debt management plan introduced in April last year. This totals 35,574 personal insolvencies in Q4 of 2009, which is a 24.9 per cent increase on the same quarter of 2008.

Pat Boyden, partner and personal insolvency expert at PricewaterhouseCoopers LLP, said: “The huge numbers of people entering insolvency demonstrates the real effect the recession is having on the average person in the UK.

However, the one chink of light in this worrying story is that more of those people entering insolvency are entering into IVAs as opposed to straight bankruptcy, meaning they are seeking ways of settling their debts.

"These numbers are an inevitable consequence of the financial problems the UK has experienced since 2008. It is still very much a consumer issue as the numbers of self-employed bankruptcies fell in these latest figures.

"Since their introduction last April, Debt Relief Orders have continued to be a popular means of dealing with smaller levels of personal debt. This is very much in line with expectations and we expect this trend to continue throughout the year."

The Tribunals, Courts and Enforcement Act 2007 introduced a new route into personal insolvency called the debt relief order (DRO) on 6 April 2009. DROs are a debt management plan suitable for non-homeowners in England and Wales with surplus income after debt repayments of less than GBP 50 a month, few assets and less than GBP 15,000 of debt. A DRO lasts for a period of one year before discharge and, as for bankruptcy, there are penalties in place for debtors who seek to abuse the process.DROs do not involve the courts and are run by The Insolvency Service in partnership with skilled debt advisers, called approved intermediaries.

Statistics from a PWC report called Precious Plastic showed total household borrowing currently stands at GBP 1.5 trillion. Unsecured borrowing remained broadly constant over the past 12 months at around GBP 230 billion compared to a six per cent increase in 2008.

Average household debt stands at GBP 60,000 per house made up of GBP 50,000 in secured debt and GBP 10,000 in unsecured debt. The average household will need to spend approximately 15 per cent of net income just to service interest payments arising from this debt.

Brian Johnson, insolvency partner, HW Fisher & Co chartered accountants, said: "The latest corporate insolvency figures reflect what we're seeing on the ground. The perception is that insolvency practitioners are incredibly busy at the moment, but that simply isn't the case. But, there's definitely a great deal of pent up pressure in the system - the banks are monitoring the current situation, and while they are not extending credit, they are not calling in debts either. Likewise, the Inland Revenue has started to exert some pressure on companies that are stalling on paying their PAYE/NI and VAT bills, but they appear to be reluctant to adopt an overly aggressive stance.

"The general feeling amongst insolvency practitioners, is that the current lull is very much the quiet before the storm and that the number of new cases will rise dramatically post election."

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