The latest figures from the Insolvency Service show that in 2014 the number of people in England & Wales who had personal debt problems fell to their lowest level for 10 years. In 2014 just over 99,000 were recorded as officially insolvent compared to 101,000 in 2013.
In fact the figures have been reducing steadily each year since they hit a peak of 135,000 in 2010 after the end of the last recession.
The official figures consist only of people who have carried out a formal insolvency procedure. In other words those who have gone Bankrupt, started an Individual Voluntary Arrangement (IVA) or a Debt Relief Order.
Because they do not include individuals who decided to resolve their debts informally using a Debt Management Plan (DMP) I have long argued that this is a failing of the statistics. Nevertheless they do provide a good indicator as to the trend of people with debt problems and this certainly seems to be downward.
So why are the number of people with debt problems falling?
In the first two quarters of 2014 official figures seemed to suggest that the number of people struggling with debt was again on the rise. At the time I suggested a possible reason for this was that people had been using their savings to make ends meet and this resource was now running out.
However the trend did not continue and in quarter three and four there were again sharp reductions in the numbers meaning a fall for the year overall. The reason for this is due to a combination of factors.
Firstly low interest rates continue to provide a significant breathing space for many home owners. For some time now these people have been in a better position than ever to repay their unsecured debts because their mortgage payments have reduced considerably.
Falling living costs generally also have a role to play. Especially in the latter part of 2014 with super market price wars and fuel price reductions the cost of the average shopping basket for many did reduce freeing up cash which could then be used to help with debt repayments.
I also believe that a very real factor influencing the health of individuals finances over the past two to three years has been the PPI mis selling scandal. As a result literally billions of pounds has been returned to individuals. Some of these have no doubt used the cash to maintain their debt repayments or pay off their debts entirely which they would otherwise never have been able to do.
Why have IVA numbers increased?
Despite the overall fall in the number of people using formal debt solutions the number starting an IVA actually increased 7% in 2014. These have now reached their highest take up levels since the solution was introduced in 1987. In comparison the number of people going Bankrupt fell 17% and the number starting a Debt Relief Order (DRO) fell 3%.
The reason for this can be simply explained by the fact that over the past 2-3 years the IVA solution has become more accessible compared to Bankruptcy or a DRO.
The monthly payments required to start an Arrangement have reduced from £150 a month to as low as £80. As a consequence it is possible to start this type of Arrangement if your debts are as low as £6000. Previously debt levels would have had to have been £10,000-£12,000.
The fact that these criteria have been driven down means that more people now qualify to start an IVA. At the same time the up-front cost of Bankruptcy have risen (up 40% since 2010). As a result the IVA solution for which there is no up-front fee is simply more attractive. A greater percentage of people are therefore choosing to use it even though this may not always be in their best interest in the long run.
Will the number of people with debt problems continue to fall?
In the short term I believe the number of people struggling with their debts will continue to reduce. There seems to be no reason to think otherwise. Interest rates do not look as though they are going to rise anytime soon and inflation and thus the cost of living remain depressed.
The result of these things is that in general people have more spare cash which they can use to keep up with their debt repayments each month and thus avoid personal insolvency.
In addition banks seems to be maintaining their tight lending criteria and the Financial Conduct Authority (FCA) is stepping up the fight to reduce irresponsible lending from the likes of payday loan companies. As such fewer people will borrow more than they can afford.
To my mind the only thing that is likely to upset the applecart is a sudden reversal in interest rate policy or a return to recession. However that only seems likely if there is a major upset across the European economies. Watch this space…..