The official government figures have shown a modest fall in the number of people formally declared insolvent continuing the recent trend.
Overall the number of recorded personal insolvencies in the 1st quarter of 2012 has continued, although modestly, on its downward trend.
The numbers reduced by around 1.2% compared to the final quarter of 2011 and compared to a year ago there was a slightly greater reduction of 4.7%
This is in line with my predictions in February this year that the number of people declaring themselves formally insolvent will remain broadly unchanged during 2012 unless there is a dramatic economic change such as a rise in interest rates.
Number of people going bankrupt falls
Despite the overall flatness of the figures, one interesting figure is that of personal bankruptcies.
The number of people declaring themselves Bankrupt has dramatically fallen by around 27% in the first quarter of 2012 compared to the same period in 2011
Given that overall a similar number of people have declared themselves insolvent, the figures show that there has been a switch with more people now choosing the Individual Voluntary Arrangement (IVA) or Debt Relief Order (DRO) solutions.
One possible explanation for this switch is the cost of bankruptcy which now stands at £700. If faced with having to try to pay this fee or start an IVA for which there is no upfront fee, many people are perhaps choosing the IVA route.
This is despite the fact that ongoing payments in an IVA will last for five years compared to a maximum of three years in bankruptcy if at all. However the numbers of people starting IVAs has fallen recently.
Individuals swapping to informal debt management solutions?
Compared to Q4 2011, the number of people doing IVAs actually fell by nearly 10%, the first quarterly reduction in the use of this type of personal debt solution for a year.
This is perhaps another indicator that individual finances are feeling the strain as in order to start an IVA, you generally need to be able to pay at least £200 a month towards your debt.
With continuing pressure on personal finances it may be that those who might have previously started an IVA are now being forced to turn to an informal Debt Management Plan (DMP).
The DMP solution can be started with just £100 a month or even less being paid towards an individual’s debts. When money is tight, this may well be more acceptable than the formality of an IVA even though the IVA payments will last for just 5 years compared to a DMP which could last for 10 years or even longer.
Individual debt problems likely to continue
Of course it is impossible to be sure whether a reducing number of bankruptcies and IVAs is being offset by an equivalent increase in the number of informal debt management plans.
The problem remains as it has always been that there is simply no way to record how many individuals are using a debt management plan solution. As such it is virtually impossible to get a clear and accurate idea of the trend of individual insolvencies in the UK.
However what remains clear is that the economic situation continues to be difficult for many people with the government’s austerity plans still firmly in place and the UK economy back in recession.
I have long said that as long as interest rates are maintained at their current levels, we will probably not see a significant increase in the number of personal debt problems in the UK.
The Bank of England rate is set to remain unchanged for this year at least. However individual mortgage lenders themselves are now beginning to increase the mortgage rates they charge. As such increasing personal debt problems by the end of 2012 should certainly not be ruled out just yet.
