Individual insolvencies rocket to record high
Fears that a "personal insolvency storm" is gathering grew today as it emerged that the number of people using individual voluntary arrangements to become insolvent rocketed by a fifth to a record high in the second quarter of the year.
It says there were a total of 27,029 individual insolvencies in England & Wales during April to June 2014, according to figures released by the Insolvency Service. This comprised 5,452 bankruptcies, 7,006 debt relief orders (DROs), and 14,571 individual voluntary arrangements (IVAs).
While the total number of individual insolvencies rose by 5.1% compared with the same period last year, IVAs were up 20.3%, which more than offset a decrease in bankruptcies and DROs.
The IVA figures add to growing fears that continued low interest rates have led to many people and households over-extending themselves.
Brian Johnson, insolvency partner at chartered accountants HW Fisher & Company, said: "The casualty list from Britain's credit-fuelled boom is growing - with the rate of individual insolvency jumping at the fastest rate for five years.
"Soaring levels of consumer confidence have led Britons to shrug off austerity, and tempted more of us to overextend. After years of cheap credit, the human cost is beginning to be counted. With as many as a quarter of mortgage holders facing unaffordable payments if interest rates rise to a more normal level of 3%, a personal insolvency storm could be gathering"
The rise in IVAs takes them to their highest quarterly number since they were introduced in 1987. IVAs are legally-binding agreements that allow people in debt to repay their creditors by making a monthly payment at an amount they can afford. They are less serious than bankruptcy, which leaves a mark on a debtor's credit record for six years.
Mark Sands, personal insolvency partner at Baker Tilly added: "It is to be hoped that many of those people entering IVAs now will be able to see them through to their successful conclusion, but the prospect of interest rate rises, even if gradual and limited as promised, will have a significant impact on those whose budgets are already tight."
The number of company liquidations in England and Wales decreased to just 3,461 in April to June 2014, down 15.1% compared to the same period last year, the Insolvency Service added.
It also said administrations, company voluntary arrangements and receiverships were also lower than a year ago.
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.
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.