With the latest government figures showing a fall in the number of people being declared bankrupt we consider if the worst is over or whether we should still be concerned about personal debt problems in the future.
Last week the government’s Insolvency Service released its latest set of personal insolvency figures. These showed that formal personal insolvencies fell 15.5% in quarter one 2011 compared to the same quarter the previous year.
Even after taking into account a rise in debt relief orders (DRO), the total number of people who were declared bankrupt (either through formal bankruptcy or the DRO route) fall by nearly 20%. The number of people starting individual voluntary arrangements (IVA) fell by 8% to 10800.
These reductions are made all the more significant given that the first three months of any year are normally the busiest for personal insolvency after the excesses of the Christmas period.
We therefore ask whether these figures therefore mark an end to the seemingly unstoppable year on year rise in personal debt problems.
Reducing demand for credit
One suggestion for the reason behind the fall in the number of insolvencies is that people’s attitudes to spending are changing. They are making a decision to reducing the amount they spend on luxury goods and thus the amount they need to borrow and instead are focusing on saving money.
If so this is to be welcomed. However I would question whether the spending habits we have nurtured and developed over the past 20 years are really so easy to change.
In my view, the demand for spending remains high. However economic demand (the ability to afford to pay for what we want) has been dramatically reduced because of tight lending criteria by banks meaning that less credit is now being made available.
People still want to spend, however they are simply unable to access the credit necessary for them to do so. With less credit available, the number of people with debt problems is starting to decline.
The question remains, will spending and therefore debt problems increase once again as soon as the banks start to relax their lending criteria?
Distorted insolvency figures?
When considering the insolvency figures, it is also important to remember that they do not represent a true reflection of the number with serious debt problems in England and Wales.
This is because the figures do not include those people who choose to manage debt problems with informal Debt Management Plans (DMP).
The number of people starting debt management plans is not recorded. As such it is impossible to get a true picture of whether this figure is now also falling or indeed actually on the increase.
Nevertheless, it is largely accepted that at least as many people who declare themselves formally insolvent also start DMPs. The actually figure is possibly even double that.
This is a very significant number of people and a small increase in these numbers could easily move the total number of insolvent people from decline to increase.
Have personal insolvency figures peaked?
The most important question is have the personal insolvency figures now peaked or can we expect them to rise again by the end of the year?
I believe there are strong arguments to suggest that they will rise again. The first is that the impact of the public sector spending cuts is only just starting to take effect. As such they are not reflected in the quarter one insolvency figures.
The government cuts mean that it is almost certain that a large number of people will see their real incomes fall over the next few months.
Combine this with the current rises in the cost of living and it is easy to see how many people could reach a point where they are no longer able to maintain their debt payments.
Interest rates are also a key lynch pin. As soon as rates start to rise, up to 90% of mortgage holders will see an increase in the cost of their mortgage payments. This will put significant extra strain on household budgets.
It would be a good thing if personal insolvencies are indeed on the decline as the official figures suggest. However I think it is far too early to be confident of that happening.
It is easy to see how personal finances will take a turn for the worse over the next few months. Even if banks are now lending less, there is still a massive amount of personal debt still owed (still around £1.4 trillion).
Many of the people who owe this money are currently struggling to keep their heads above water. If their finances continue to be pressured, the number of people suffering with debt problems will almost certainly spring up once again.
