Insolvencies set to rocket despite dip in 2007
The number of people declaring themselves insolvent fell in the last three months of 2007 but experts warn that bankruptcies and Individual Voluntary Arrangements will rocket in 2008.
Statistics from the Insolvency Service show that there were 24,846 personal insolvencies between October and December last year, a decrease of 16.4% on the same period in 2006.
During the three months, there were 15,659 bankruptcies, down 8.3% from 2006, and 9,188 IVAs, down 27.3%.
During the whole of 2007, the number of people becoming bankrupt increased while the amount of people taking out an IVA fell. Overall, there were 106,645 personal insolvencies in 2007 - a slight decrease of 0.6% from the previous year.
The Insolvency Services says the figures represent a break from the trend of rising insolvencies it has seen since 1997.
It also reports that the majority of bankruptcies between October and December last year were brought on by the individuals declaring themselves bankrupt, rather than by creditor petitions.
Outlook for 2008
Experts are predicting that higher mortgage repayments, food costs and energy bills, as well as a general slowing economy, will spark a surge of insolvencies in 2008.
Recent research from Grant Thornton forecast that 120,000 people will become insolvent in 2008.
Mike Gerrard, head of personal insolvency at Grant Thornton, warns the fall in insolvencies last year doesn’t mean fewer people are getting into debt. He believes many people are trying to avoid the stigma of bankruptcy by trying to cope with their debts.
The latest figures show personal debt in the UK has hit the £1.4 trillion mark.
Gerrard says: “It's a tough climate out there with forecasts for a rise in inflation and a slowing economy, and that will inevitably flare up the insolvency figures over the next few quarters.
“We've probably seen the last of any decreases in insolvencies for at least the next six months.”
Terry Balfour, director of IVA.com, says the fall in IVA numbers is down to high rejection rates from creditors, high fees and the process becoming more complicated.
He says: “Insolvencies will rise this year because of the increase in the cost of living plus the housing market slowdown. Hopefully, the new IVA code of conduct will bolster consumer confidence in this route out of debt.”
IVA code of conduct
The Insolvency Service has agreed a code of conduct with the IVA industry and banks in a bid to make the process more transparent.
IVAs have been the subject of criticism from the debt industry because of the way they are marketed and the high level of fees involved. Last year both the Office of Fair Trading and the Advertising Standards Authority banned several IVA adverts because their claims were mis-leading.
An IVA is where a debtor agrees to pay back a certain amount of his/her debt to creditors within a set period. After this time the outstanding debt is written off, but all creditors must agree to this arrangement for an IVA to take place.
Tim Moss, head of debt at moneysupermarket.com, says the code will increase consumer confidence in IVAs.
But he adds: "This code should only be seen as the start. In today's economic climate, compulsory regulation should be introduced. This shouldn't be a problem for the industry if it believes in treating customers fairly."
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Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.