The Insolvency Service’s most recent quarterly personal insolvency figures  have showed that the number of people who went Bankrupt fell by 20% in quarter three 2012 compared to the same quarter in 2011.

Despite this the overall number of people declaring themselves insolvent rose by 2.5% in quarter three compared with quarter two 2012. Significantly this was the first quarterly rise for a year largely due to an 11% increase in the number of people starting Individual Voluntary Arrangements (IVA).

So why is the number of people going Bankrupt continuing to fall so significantly even when the number of people declaring themselves insolvent overall is rising?

The cost of bankruptcy acts as a barrier

One of the key things preventing people from going bankrupt even after they have decided that this solution is the best one for them is without doubt the associated upfront cost.

If you are struggling to pay your monthly bills the up front cash fee is a very significant amount of money to try and get together. And if you are a couple who both need to declare bankruptcy due to joint debts the cost doubles.

Faced with having to find this cash many people disguard this option as simply too expensive and decide instead to start an alternative solution with no upfront fees.

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Falling entry barriers for Individual Voluntary Arrangements

The above argument is born out when looking at the IVA figures. The number of people starting these solutions started to rise again in quarter three 2012 after four consecutive quarters of decline.

One reason for this is that there is no upfront fee to pay. You simply start making one affordable monthly payment towards your debt after the Arrangement is accepted.

The other reason may be that over the past 12 months the criteria for starting an Arrangement seems to have been relaxed. It is possible to do so with debts of £12000 or less based on a monthly payment of as little as £120.

In times gone by it was impossible to start this debt solution unless the debts were at least £15000 and at least £200 a month could be paid in.

Is it sensible to avoid Bankruptcy?

Whatever the reason for people avoiding bankruptcy and choosing alternative debt solutions, the concern must be whether they are choosing the debt solution for them or simply the one that they can afford.

If you can only afford to pay £120 a month towards your creditors, starting an IVA and gaining immediate protection from collection activities is certainly appealing. This must be particularly so when compared to having to save for six or seven months or more to go bankrupt while dealing with the constant stress of daily telephone calls, letters and the threat of court action from debt collectors.

The problem with this situation though is that invariably people who really should declare themselves bankrupt and become debt free in 12 months are choosing what they see as a cheaper option. But starting an IVA will result in having to maintain payments for five years.

The risk of low monthly payment IVAs failing is potentially great as any slight upward movement in living expenses such as a small rent increase will render the IVA payments impossible and with no room for reduction the agreement is likely to fail.

If this happens particularly within the first year or two of the IVA, the payments already made will almost certainly be lost and the individual back to square one. Only then when time and money have been wasted will the individual realise that it would have perhaps been better to save and go bankrupt

What will bankruptcy levels do in the future?

Amongst the headline grabbing fact that the number of bankruptcies continues to fall, it is important to note that in quarter three 2012 the overall number of people declaring themselves formally insolvent rose for the first time in over a year.

I have long argued that it is unlikely that the number of people struggling with debt will rise significantly until interest rates start to rise. The expected affect of this is that mortgage payments will increase and large numbers of homeowners will start to struggle with debt repayments.

Well, Bank of England interest rates have not risen. However mortgage lenders have started to increase mortgage rates over the past 6 months. Perhaps these increases, which have not been across the board are now starting to work their way through the system.

If this is true then the Bank of England must be worried about the effect that an interest rate rise across the board could have on millions of indebted homeowners.

However once the economy starts to improve and inflation again takes hold, the Bank of England may have no choice but to act on interest rates thus potentially spelling disaster for many individuals.