Insolvencies fall but more people struggle
The numbers of both individual insolvencies and company liquidations fell last year - but experts have warned the figures are disguising thousands struggling to pay their debts and cannot afford bankruptcy.
Insolvency figures released by the government today show there were more than 25,000 individual insolvencies in the final quarter of last year, down 20% on 2011, while there were 109,477 insolvencies – a declared inability to pay debts – in England and Wales in 2012, down 9% on the year before.
Similarly, company liquidations fell 3% in the last quarter of 2012 and 11% down on 2011 to 3,834.
But a decreasing number of bankruptcies is not necessarily a positive sign, according to Joanna Elson, chief executive of the Money Advice Trust.
She says: "It does not appear to indicate any alleviation of household debt problems, but is instead a dangerous quirk of the current insolvency regime."
She adds that people struggle to fund the £700 needed to petition for bankruptcy leaving them "to drift in a financial black hole where they can't afford to repay their debts, can't afford bankruptcy and have no other way out".
Steve Rees, managing director of debt consultants Vincent Bond & Co, agrees. He says: "It is encouraging to see fewer people are having to take a formal route to resolve their debts. But this does not give the bigger picture, as many more are struggling than the statistics show.
He says there is a growing number of people seeking "DIY solutions" to their debt such as negotiating directly with creditors rather than seeking bankruptcy.
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.