The number of people declared insolvent has soared over the past year to hit a record high, the Insolvency Service has announced.
There were a whopping 35,242 individual insolvencies in England and Wales between June and September, up more than 28% from the same period last year. This included more than 18,000 bankruptcies (up 6.4%) as well as 12,000 individual voluntary arrangements (up 20.9%) and 4,505 debt relief orders, a new debt solution introduced this April.
Meanwhile, the number of businesses going bust shot up by 14.6% over the past year, although this has slowed during the third quarter of 2009.
There were 1,301 compulsory liquidations (down 12.9%) and 3,415 creditors' voluntary liquidations (up 30.2%) between June and September. The Insolvency Service says around one in 114 active companies went into liquidation during the first nine months of the year.
Although the third quarter of the current year saw a fall in the number of company insolvencies, there are concerns that this could rise again next year as the recession continues - especially if HM Revenue & Customs becomes less accommodating about unpaid VAT and other taxes.
A lack of funding has hit many businesses hard, especially smaller firms, at a time when slowing sales have put additional pressure on balance sheets and reserves. Retail and construction firms have been among the worst sectors to suffer the fall out from the credit crunch.
Brian Johnson, insolvency partner at HW Fisher & Company chartered accountants, says: "There are still thousands of companies, whose balance sheets are in tatters, that may not have the strength to make it out of the recession, and it's a sad fact that more companies fail coming out of a recession than going into one."
Experts believe the number of individual insolvencies will also continue to rise.
"It's clear that we still are experiencing the 'debt hangover' from a decade or so of spend, spend, spend mentality and we are likely to see close to 130,000 insolvencies in 2009 alone," says Bev Budsworth, managing director of The Debt Advisor.
Debt experts report a rise in the number of middle class individuals struggling to cope with their financial commitments. Professionals have been particularly affected by redundancy and income streams, such as bonuses, drying up, says Budsworth.
Alan Tomlinson, a partner at licensed insolvency practitioners Tomlinsons, says: "The shake-out from the credit boom continues apace, with more and more people being declared insolvent, and there are no signs that this is going to change in the foreseeable future."
It is unclear how many personal insolvencies there would have been if debt relief orders hadn't been introduced earlier this year. Some of the 4,500-odd people who opted for this solution may have decided to go down a different route, such as bankruptcy, or might have not taken any action at all.
Debt relief orders are aimed at people on low incomes and unsecured debts of under £15,000.
"A significant number of people who would have gone bankrupt have made use of the new debt relief orders," says Tomlinson. "The total number of people in trouble continues to rise inexorably."
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
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.
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.