The government’s insolvency service official figures today showed that personal insolvencies increased slightly in 2010 to reach the highest on record. However there is almost certainly worse to come.

The total number of official insolvencies which includes people who have been declared bankrupt or have entered into an individual voluntary arrangement (IVA) or debt relief order (DRO)  increased by 0.7% in 2010.

This was the highest number of formal personal insolvencies since records began in 1960.

However, there seemed to be some good news as the number of insolvencies actually dropped significantly throughout the year from a peak of 35682 in the first quarter to 30729 in quarter four. This is a reduction of nearly 14 percent.

The hidden picture of personal insolvency

However there remains a serious concern that the official figures give an incomplete picture of the real state of personal insolvencies in England and Wales.

The figures collected by the Insolvency Service do not include people who are insolvent but do not go through a formal procedure. Rather they choose to resolve their debt problems using an informal Debt Management Plan (DMP).

It is estimated that there may be currently up to 700000 people using debt management plans in England and Wales.

Given that people generally stay in a DMP for two years, this means that nearly 30,000 a month are starting these plans thus doubling the official number of people who are unable to repay their debts.

More personal debt problems on horizon

Despite the overall number of insolvent people being much larger than the official figures suggest, if we assume that the number of people using debt management plans is reducing at the same rate as those going through formal insolvency, it could be argued that we have survived the worst of the recession relatively unscathed.

However, I believe that in 2011 we will see the numbers of people unable to repay their debts on the increase once again.

The full effects of the government cuts and the seemingly relentless increase in the cost of living have simply not yet fully hit home and will therefore not be reflected in the official figures for some months.

These are likely to severely hit people’s pockets throughout this year and more and more people will find themselves in a position where they are struggling to repay their debt.

In addition it is becoming increasingly likely that we will see interest rates rise before the end of the year. Even a small rise will make it much more difficult for many currently on standard variable rates to pay their mortgages. This will inevitably lead to a higher number of debt problems.

Insolvencies may increase still further

The fact that the office number of personal insolvencies seemed to level out during 2010 is certainly cause for optimism. However this should by no means by a sign that the worse is over.

With further cuts to incomes and cost of living increases likely throughout 2011, now more than ever it is important for people to keep control of their finances, pay off debt where they can and keep any extra borrowing to a minimum. If problems with debt do start to occur it is vital to tackle these as early as possible.

With the recent cuts in government and local council funding for Citizens Advice Bureaux more people will have to turn to debt management companies to help them overcome their problems.

Some recent media reports would have us believe that such companies cannot be trusted to do a good job. In reality this is simply not the case and many provide excellent levels of service.

However doing proper research and really understanding all of the options available and their advantages and disadvantages is vital before deciding how to deal with a debt problem.