Personal insolvency at an all-time high
Personal insolvencies in England and Wales are at an all-time high, according to new figures.
The government’s Insolvency Service says levels of personal insolvency have increased for the ninth consecutive quarter and are at the highest level since records began.
There were 35,682 individual insolvencies in England and Wales in the first quarter of 2010. This was an increase of 17.9% on the same period last year.
This figure is made up of 18,256 bankruptcies, 11,782 individual voluntary arrangements (IVAs), and 5,644 debt relief orders.
Bankruptcies were down 10.7% on the same period last year, but up 7.3% on the previous quarter. The number of IVAs was up 20.1% on the same period last year while the number of people taking out debt relief orders, which were introduced last April, also increased.
Alan Tomlinson, a partner at UK-licensed insolvency practitioners Tomlinsons, says the debt relief order figures show people are trying to manage, rather than succumb to, their debts.
"Many people who have been struggling with big debts and reduced income have managed to survive the past two years because of low interest rates. If interest rates had been any higher, the figures would have been considerably worse,” he says.
“When interest rates rise, and rising inflation suggests that this could happen sooner rather than later, the number of people facing real financial difficulties will spike sharply.”
Debt relief orders are aimed at people who cannot afford to repay their debts and have less than £50 a month to live on after paying their rent and bills. To be eligible you must have £15,000 or less 'qualifying' debts and assets worth less than £300 – although you can own a car worth up to £1,000. Assets also include your pension.
Qualifying debts include loans, overdrafts, credit cards and demands from utility companies.
During the period the debt relief order runs (normally 12 months), your creditors will not be allowed to take action against you to get their money back. At the end of the 12 months you’ll have effectively wiped the slate clean.
The Insolvency Service figures show the number of companies going bust fell sharply. There were 4,082 compulsory liquidations and creditors’ voluntary liquidations in total in England and Wales in the first quarter of 2010. This was a decrease of 8.4% on the previous quarter and a decrease of 17.8% on the same period a year ago.
"The number of company liquidations appears to have peaked and this is welcome in that it shows companies have become battle-hardened and are finding ways to survive,” says Tomlinson.
“But these relatively positive figures are likely to be short-lived. The number of companies folding will almost certainly rise in the months ahead because of the lag effect.
"Once the new government is installed, the decisions it takes will have major ramifications for UK businesses and so to some extent it is a case of wait and see.”
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 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).