In 2012 109,000 people became formally insolvent entering into an IVA, Debt Relief Order or Bankruptcy. This means that formal personal insolvencies reduced last year to the lowest level since 2008, the year when the UK entered into recession.

This figure which is issued by the insolvency Service has now been falling for the past two years. It represents a 9% fall on the 2011 figure and nearly a 20% fall from the peak of 135,045 in 2010 (see Table 1 below).

But with ongoing reports of retail closures, job losses and zero growth rate in the economy how can it be that the number of individuals suffering with financial problems is falling?

Why are the personal insolvency numbers falling?

Throughout the past 5 years the UK economy has been in and out of recession. Personal insolvency numbers grew significantly in 2009 and 2010 as expected following the backlash of the credit crunch and recession that followed.

After nearly 20 years of economic growth and freely available credit, the banks suddenly stopped lending and many people who had been keeping their heads above water by borrowing more were left with no other option than going bust.

However in 2011 and 2012 the number of insolvent individuals has started to fall significantly once again. This is puzzling given that the UK fell back into recession in 2011 and arguably the economy has remained fairly static since then. Surely the double dip recession would also equal a period of increasing personal financial problems?

Table 1:

Low interest rates since 2009 have cushioned debt problems

One of the reasons why personal debt problems have fallen since 2011 is the reduction of new bank lending. This has significantly reduced the opportunity for individuals to continue to over extend themselves financially.

As such this must in part at least be responsible for the falling number of personal insolvencies. However by far the most significant factor in the depression of insolvencies is low interest rates.

Interest rates and thus mortgage payments have remained at an all time low since 2009. As such those who have managed to cling on and stave off insolvency through 2009 and 2010 are now continuing to keep their heads above water.

Will personal insolvencies start rise again?

This is the question on everyone’s lips from the chancellor down. My view is that there is every possibility that the number of people with financial problems will start to rise again. However for this to happen there would need to be another major financial upset. But what form might that take?

The most clearly defined upset will eventually be in the form of a rise in interest rates bringing with it a rise in mortgage payments. This would spell disaster for many home owners who are only managing to maintain mortgage payments as long as rates remain low.

If and when rates do rise they will simply not be able to continue to afford to pay their mortgage and other bills and will have to turn to some form of financial rescue.

An alternative major upset would be a significant rise in unemployment. This type of upset is more difficult to predict. However could recent major retail failures such as Comet, Blockbuster and HMV be a sign of the times?

Traditionally business insolvencies increase once an economy comes out of recession because banks feel more confident to pull the plug when the value of assets are rising. So when the UK economy eventually starts to grow banks may force more insolvent companies to close increasing unemployment levels and triggering a rise in personal insolvencies.

Falling numbers of people going Bankrupt

There has been much talk in the media of a fall in the number of people declaring themselves Bankrupt since 2008. The figures reduced from a total of 67428 in 2008 to just 31756 in 2012 (see Table 1)

In reality however a significant reason for this reduction has been the introduction of the Debt Relief Order (DRO) solution in 2009.

By 2012 DROs accounted for 31027 individual insolvencies. A DRO is in reality a form of bankruptcy for people with debt of below £15000 and little income. When you include this figure then overall the total bankruptcy figures has not fallen significantly from the 2008 levels.