Rising costs increase pressure on debtors
The number of people going bankrupt or taking out an Individual Voluntary Arrangement (IVA) has fallen by 13% in the last year but the ongoing credit crunch could reverse this trend going forward, experts warn.
Official figures from the Insolvency Service show there were 25,264 individual insolvencies in the first three months of this year. Although this is an increase of 1.7% from the previous quarter, it is a 13.2% fall from the same period in 2007.
The figures also reveal a 22% fall in the number of people taking out IVAs in the past year and a 6.8% reduction in the number of bankruptcies.
Despite the annual fall, the Insolvency Service reports the number of insolvencies is starting to creep upwards following a more significant dip at the end of 2007. And experts warn the number of people going bankrupt or taking out an IVA is set to rise going forward.
Mark Sands, director of personal insolvency at KPMG, says one of the main reasons for the fall is the drop in the number of IVAs, which have been dogged with controversy about their appropriateness and the high cost of associated fees.
However, he adds: “These concerns have now been addressed by the introduction of the IVA Protocol in February 2008 so this will only be a temporary respite we still expect to see a significant rise in IVAs in 2008.”
The rising cost of food, fuel and mortgage repayments has also raised fears that any fall at the start of 2008 could be reversed going forward.
Sands says: “Even with interest rates starting to fall, consumers are seeing the cost of their mortgages increase, fuel costs continue to go up and now food prices are rising in a manner not seen for years.
"I used to worry that consumers may panic or overreact to all the bad news around house prices, availability of mortgages and rising household bills. The reality is that many of those who are most at risk are probably not reacting enough.
“While many individuals will have to take formal steps to deal with their over indebtedness in the months and years ahead, numerous others may be able to take advantage of informal arrangements and tighter budgeting to avoid the worst effects of over indebtedness.”
Payplan, a free debt service, predicts a large jump in the number of insolvencies as a result of the rising cost of essentials such as food.
John Fairhurst, managing director of Payplan, says: “Although there has not been a big increase in the number of people going bankrupt, our clients are far worse off than they were this time last year.
“The latest figures show that people are managing to soldier on for a bit longer, but it seems that it will be only a matter of time before we see a big jump in these numbers.”
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.