UK personal debt figures fall in Q3 2011

The Government has released its latest official debt figures which show a surprising fall in the number of people who are struggling with debt problems.

The most recent figures from the Government’s Insolvency Service have shown that in the third quarter of 2011 the number of people formally struggling with their debt has fallen slightly compared to the last quarter and by 11% year on year.

The number of people using the IVA debt solution stayed static year on year although there was a marked rise from quarter two 2011 with just over 13000 starting individual voluntary arrangements. However the most startling figure was a drop in the number of people declaring themselves bankrupt. The numbers fell 31% year on year. We consider why this might be.

Why is the number of Bankruptcies falling?

It is unclear why the number of people declaring themselves bankrupt has reduced so dramatically particularly as it is arguable that the bankruptcy process is the most lenient in Europe.

One of the key factors which may be affecting the figures is the high cost of going Bankrupt. As of the 1st June 2011, an individual now has to pay £700 to the Court on the day they go bankrupt.

This cost can be reduced to £525 for people on low incomes however even then it is a significant sum to have to find if you are struggling with money to the extent that you need to declare bankruptcy. These costs have lead to calls for the government to consider a reduction in the cost of bankruptcy.

Are personal finances improving?

The fact that the number of personal debt problems is falling seems strange given the backdrop of the current economic situation in the UK.

The cost of living has soared and we have learned today that unemployment has now reached a total of 2.62 million or 8.3%. This is the highest number of unemployed people since 1994. Given this situation it would make sense if personal debt figures were increasing.

One reason for the dichotomy is that since 2008 and the onset of the credit crunch banks have been lending significantly less to individuals. With people borrowing less, there is less chance for them to build up new debt problems.

Another significant factor is low interest rates. While these are agonising for savers, those with mortgages to pay are reaping rewards with mortgage payments some of the lowest they have ever been. If your monthly mortgage payment has been halved this goes a long way to offset increasing living costs elsewhere.

What will happen to personal insolvency levels in the future?

Given the bleak economic picture it is easy to simply say that we should expect personal debt problems to get worse.

It looks as though unemployment is set to get worse before it gets better with the government growth forecast now reduced to just 1 percent in 2012. If more people start to lose their jobs we could see increasing numbers of people struggling to pay their debts.

However I believe that the debt statistics will be contained while interest rates remain on hold. Low interest rates equal low mortgage payments and this is offsetting other cost of living increases for many people.

As such those who remain in work are likely to be able to maintain their debt repayments and we are unlikely to see a deluge of new personal insolvencies until the Bank of England policy on interest rates starts to change.