According to official government statistics, the total number of people who became formally insolvent either by declaring themselves bankrupt, undertaking an individual voluntary arrangement (IVA) or a debt relief order (DRO) was nearly 18% higher than the same quarter in 2009.
The number of 35,682 individuals declaring themselves formally insolvent is the highest since records began.
The number of bankruptcies fell by 11% over same quarter in 2009 but the number of IVAs increased by 20%. This could well be an indication that people in financial difficulty are trying to protect their homes.
By declaring bankruptcy there is a strong possibility that a homeowner will lose their house. By carrying out an IVA, they remain in control of their property although they may have to release equity from it.
Real number of insolvencies far greater
It is extremely important to remember that the official figures do not include everyone who is insolvent. Many individuals choose to deal with their insolvency on an informal basis using a debt management plan.
In my experience of working with those who are insolvent, the number of people who choose to resolve their problem using a debt management plan is at least equal to those who deal with the situation formally.
There are no figures recorded which can give a better insight into this, however my worry is that the reality is in fact that the numbers entering into these kinds of arrangements is actually double or triple those using formal proceedings.
If this is correct, the number of people who actually became insolvent in the last quarter is likely to be nearer 70,000 – 100,000.
No end in sight
Despite early signs of economic recovery, the number of people expected to face financial difficulty in the coming months is set to increase.
A recent survey conducted by Capital Economics suggested that up to 750,000 jobs could disappear as a result of public sector spending cuts required to get the country’s finances under control.
If this turns out to be correct, then the number of people who fall into a position of not being able to pay their debts is likely to increase significantly.
In addition, as interest rates have fallen to their lowest levels for decades, many homeowners have found their monthly mortgage payments reduce significantly.
This has protected many from the effect of falling wages due to reduced working hours and redundancy and I believe has had a significant effect in suppressing the number of people who have suffered with debt problems.
However, with recent increases in inflation, interest rates are predicted to start rising again. As the cost of mortgages start to increase this could push even more people into position of insolvency.
The number of people suffering with debt problems is currently at record levels.
Worryingly based on current economic predictions this situation is not likely to improve any time soon.
In fact, I believe the situation is likely to get even worse before signs of improvement start to be seen.
Steve Jackson is a debt adviser from BeatMyDebt.com in the UK. For more quality and unbiased information on Individual Voluntary Arrangements, visit our website at www.beatmydebt.com
