The Government has today released figures which show the number of people suffering with personal debt problems in England and Wales has risen in the second quarter of 2014.
The numbers registered as formally insolvent totalled 27,209 in the second quarter of 2014 which is an 8.3% increase compared to the first quarter of the year and a 5.1% increase over the same quarter in 2013.
While the number of people going Bankrupt and using Debt Relief Orders has remained relatively flat compared with the first quarter those starting Individual Voluntary Arrangements (IVA) has risen by 14.6% and a whopping 20.3% compared to Quarter 2 in 2013.
Why are the number of debt problems rising again?
The official figures show that the number of people with debt problems has been falling since 2010. However the figures produced today seems to suggest that this trend may be reversing.
The reason for this is likely to be that personal debt problems never actually went away. It is just that over the past few years they have been suppressed as individuals have been using their savings and taking advantage of low interest rates and their resulting low mortgage payments to make ends meet.
However savings cannot last forever and with wage growth still dragging behind inflation perhaps a tipping point has now been reached where more and more people have come to the end of their savings and are struggling to cope financially.
According to the government’s financial advisory service The Money Advice Service (MAS) there are 8.8 million adults who are over-indebted in the UK. A report by the Resolution Foundation think tank earlier this month predicted that by 2018, 1.1 million households could be in “debt peril” with more than half of their post-tax income going towards repaying debt.
Why are more people choosing to start Individual Voluntary Arrangements?
It is interesting to note that the solution which seems to be the most popular with people who are trying to deal with their personal debt is the IVA.
The use of this solution is currently rising dramatically with the second quarter 2014 seeing the highest take up of any quarter in the last 5 years while the use of Bankruptcy and Debt Relief Orders has been falling.
The reason for this is because over the past year to 18 months the acceptance criteria for IVAs have dramatically reduced. In the past an individual was unable to use this solution unless their debt totalled at least £15,000 and they could pay £150 a month into the arrangement.
Now however it is possible to start the Arrangement with debts of just £6000-£8000 and payments of £100 a month and in some situations as low as £50 a month. This is also no upfront fee to pay.
This is in stark contrast to the cost of declaring Bankruptcy has constantly risen over the past few years and is now standing at £705 per person or £1410 per couple. An amount which has to be paid in cash up front.
What impact will a rise in Interest Rates have?
Given that the number of people struggling to pay their debts seems to be on the rise again when we look to the future this has to be with certain amount of concern.
It now seems more probable than ever that interest rates are set to rise as early as the beginning of 2015. If and when this happens it will pile more pressure onto home owners who will see their mortgage payments increase.
This additional burden on family finances will almost certainly push more people into a situation where they can no longer make ends meet and so are forced to use a debt management solution. This will therefore help the numbers of people who are declared formally insolvent continue on an upward spiral.
This most then be serious food for thought for Mark Carney and the Bank of England Monetary Policy Committee when they are deliberating over when a rate rise will finally come. Perhaps given the potential resulting deluge of personal debt problems this will be far later then everyone currently thinks.
