Figures published on Friday 7th February by the Insolvency Service have shown that the number of people who were officially unable to repay their debts in England & Wales fell by 7.9% in 2013 compared with the year before.
Just over 101000 people went Bankrupt, started a Debt Relief Order (DRO) or an Individual Voluntary Arrangement (IVA) in 2013 compared to nearly 110,000 in 2012. On the face of it this is good news both for individuals and for the UK Government and certainly falls in line with the arguments suggesting that the economy is on the mend.
In fact the number of people who have chosen to deal with their debt problems using a formal debt solution has been falling since 2010. The reason for this seems largely due to the tightening of the bank’s lending criteria since the 2009 credit crunch which has prevented more people from borrowing money they are unable to repay.
Low interest rates mean fewer debt problems
The additional key factor which has kept personal debt problems at bay over the past 5 years has been ultra low interest rates.
For most home owners this has mean that mortgage payments have remained static and in many instances significantly reduced. They have therefore been able to divert the money they have saved on their mortgages towards the repayment of their other debts.
The question of course is what will happen to these people when interest rates begin to rise? If wages and incomes remain static I fear the result will almost certainly be a new wave of personal debt problems as mortgage payments are pushed up and families are forced into a corner with their other debt repayments.
IVAs are on the increase
Despite the overall reduction in official personal debt problems there has been one figure that has risen in 2013. That is the number of people starting an Individual Voluntary Arrangement (IVA).
My view of why the number of these Arrangements has risen while the number of Bankruptcies and Debt Relief Orders (DRO) have both fallen is that they are easier solutions to implement.
People are being forced to start an IVA because on one hand the cost of Bankruptcy is prohibitive and on the other the strict and some would argue antiquated acceptance criteria for a DRO simply stop people from using that solution.
At the same time over the past 18 mths the acceptance criteria for IVAs has fallen and so this option has arguably become easier to start. As such is it any wonder that they are becoming more popular?
Is there demand for more accessible debt solution?
An issue that is frequently raised by personal debt experts is the fact that the official figures do not give a true reflection of the number of people with personal debt problems because they do not record everyone who is insolvent.
A huge number of people choose to deal with there debts by starting an informal Debt Management Plan (DMP) with their creditors of which there is no formal register.
Given this there is currently no way of knowing whether the real number of people with serious debt problems is actually falling, stagnant or even increasing. Perhaps therefore the increase in demand for the IVA debt solution does help to give a reflection of a more worrying picture of personal debt problems in the UK and the need for accessible solutions to solve them.
On top of this I think there is no question that if interest rates start to rise too soon then the number of recorded personal debt problems will be on the increase again. Perhaps the policy makers at the Bank of England believe this too and that is why they will be reluctant to make a rate change any time soon.
