Headline figures show personal insolvencies in the UK have fallen by 11.3% between in 2011 compared to 2010. However has the number of people struggling with debts in the UK really fallen?

The number of people who have declared themselves formally insolvent has reduced in 2011 to approximately 120,000 compared to a record high of around 135,000 in 2010. This is in stark contradiction to my predictions of a year ago where I said that the number of people who declare themselves insolvent in 2011 would be likely to increase once again.

However on closer inspection of the figures the reason for the fall in insolvencies is largely to do with a dramatic fall in the number of people declaring themselves Bankrupt. A 30% drop year on year. The other formal insolvency solutions which make up the figures are individual voluntary arrangements (IVA) which have remained broadly static and debt relief orders (DRO) which have increased in number.

Have personal debt problems really reduced?

One significant argument for why the number of people declaring Bankruptcy has fallen is that the £700 cost is actually stopping many people who would otherwise have done so. The cost in England and Wales increased from £600 to £700 in 2011 alone.

Instead of paying this fee, people are choosing to carry out informal Debt Management Plans (DMP). The problem is that there is no data to prove or disprove this theory as the numbers of these kind of Plans started in 2011 is unknown because there are no formal records kept.

The anecdotal evidence from many organisations providing debt management solutions such as the CAB (Citizen’s Advice) and the CCCS (Consumer Credit Counselling Service) is however that they have never been busier. Perhaps then a greater personal debt problem lies beneath the positive headlines of the official insolvency figures.

Tough UK economic climate remains

All of the current economic indicators suggest that financially at least times will remain tough for individuals and families in 2012. Economic growth in the UK fell by 0.3 percent in the last quarter of 2011 and many are predicting a double dip recession.

Negative growth means that employers are less likely to employ more people and are less likely to increase the wages of those they do employ. This means continuing static or even reducing incomes are to be expected.

As a result the cost of living is still rising faster than average wage growth putting increased financial pressure on the individual and cultivating an environment for personal debt problems to rise to the surface.

The one saving grace for many home owning families is the ongoing financial protection they are receiving from low interest rates. While interest rates remain low, mortgage repayments in general also remain low allowing people to successfully offset rises in the cost of living elsewhere and to keep their heads above water.

Bankruptcy prediction for 2012

In my view the official number of people with formally recorded debt problems including bankruptcy may well remain static or even continue to fall in 2012 unless changes reducing the cost of bankruptcy currently being discussed are introduced.

This situation would only dramatically change if interest rates start to move upward. However it seems unlikely that this will happen in the next 12 months.

Despite the official figures it is more than possible in my opinion that in fact the numbers of people struggling with debt problems in 2011 was at least the same if not greater than in 2010 simply because of the huge numbers of uncounted people who try to resolve their debts informally. However because informal insolvencies are not measured, it will be impossible to prove or disprove this theory.

If we could only measure the number of people who are actually insolvent but chose to carry out an informal debt management plan, I also believe that we would see a continuing rise in the number of people struggling with debt in 2012.