Personal insolvencies at highest level for a decade

The combined number of IVAs, bankruptcies and debt relief orders (DROs) hit 122,181 last year, according to official statistics released on January 30 by the Insolvency Service. Bankruptcy numbers in particular are the highest they’ve been since 2014, at 16,702.

Figures from the Insolvency Service – which administers the insolvency regime in England and Wales – also show that IVAs reached their highest year on record. Although they dropped slightly towards the end of 2019, IVAs still increased to an annual total of 77,982. Total DROs dropped slightly to 27,497.

For the first time as the insolvency stats were announced, StepChange Debt Charity published the termination rates of its IVAs alongside the Insolvency Service figures.

The figures show StepChange VA termination rates were well below the industry average, and much lower for early years failures. The proportion of IVAs that failed within their first year was 8.4 percent in the market as a whole. StepChange said that, given StepChange’s own rate is much lower, this was "worryingly high."

The charity said that the difference between StepChange VA and wider market performance strongly suggests that "at least some providers are exercising a much less robust assessment of risks and consequences to consumers."

On regulation of IVAs, StepChange said the current oversight of the IVA sector still relies far too heavily on an outdated professional self-regulation model that "lacks both independence and clout."

Peter Tutton, head of policy, research and public affairs at StepChange, has written a blog on the topic on StepChange’s website.

The macro trends

Duncan Swift, president of insolvency and restructuring trade body R3, said: “Individuals have benefited from low inflation, real wage increases, and record employment levels, but this has been counter-balanced by rising consumer debt and the fact that not all employment is secure.

“For the most financially vulnerable, the problems with the benefits system have been well-publicised.

“Finances are stretched for many, and financial resilience is low. It doesn’t take much of a shock – a missed benefit payment, an unexpected bill, or a reduction in hours – to cause financial problems. Real wages are rising, but having fallen for so long before that it’s a bit too late for some, while wage increases will not be evenly distributed.”

The financial resilience of consumers across the UK, along with downward pressure on wages, will be explored by Santander’s chief economist Frances Haque at the Credit Summit in London on March 19.

Amidst such trends, Swift also believes that banks and other lenders have continued to tighten their credit standards in response to the Bank of England’s concerns around consumer over-indebtedness, which means many people have lost a fall-back option they may have used in the past.

He explained: “The length of time consumers have to repay zero interest credit cards has shortened, which may partially explain why consumer credit card repayments overtook new borrowing at the end of last year, for the first time since 2013.

“It is worth remembering that insolvency procedures are only a rough guide to the true scale of individual indebtedness in the UK. Often, the question is about access and whether someone who is unable to maintain their level of debt can meet the criteria to enter an insolvency procedure. The personal insolvency figures are only part of the picture showing the true level of serious financial trouble for individuals.

"Creditors are focusing more on pursuing individuals through other avenues such as bailiffs," Louise Brittain, Wilkins Kennedy

Louise Brittain, partner, restructuring and insolvency, at the law firm Wilkins Kennedy, said: “DROs are for people who have under £20,000 in debt, but the fact they have had to go down the route of bankruptcy or IVAs could be an indication that consumers are running up greater debt than £20,000 in unsecured debt, such as loans or credit card debt, so the burden of debt is rising.

“The cost of creditors applying for bankruptcy proceedings has also massively increased so unless creditors think they’re going to get their money back, they’re not pursuing their debts because the cost is too expensive. Creditors are focusing more on pursuing individuals through other avenues such as bailiffs.”

Michael Mulligan, insolvency and restructuring partner at law firm, Shakespeare Martineau, said: “The UK has retained its status as the country with the highest level of personal insolvency in the world. The total number of county court judgments (CCJs) issued against individuals in debt reached 1.15 million in 2019 – the highest on record.

“The availability of seemingly ‘cheap’ debt and short-term loans continues to be an issue and people are still being caught out by the temptation of accessible borrowing.”