Calm before the storm? Personal insolvencies fall, but many may be “one change away”

Official statistics out today from The Insolvency Service show IVAs remained the dominant figure of the wider personal insolvency total, from January to March.

Overall, the figures show that in the first quarter, there were 27,849 individual insolvencies as a result of:
• 16,714 individual voluntary arrangements (IVAs);
• 6,875 debt relief orders (DROs);
• 4,261 bankruptcies.

Total individual insolvencies did drop though between January and March, when compared with the previous quarter and with the same three-month period in 2019.

Bankruptcies however have reversed this trend, rising during Q1 compared to the previous quarter and year-on-year. It is also notable that bankruptcies initiated by the person in debt, which can be processed entirely online with no need for court involvement, are at their highest level for over six years.

Creditor-initiated bankruptcies, which do require court hearings, have fallen to their lowest level in at least 10 years.

On releasing the stats, The Insolvency Service said the overall trend for all individual insolvencies continued to be driven by the volume of IVAs. Lenders have been closely monitoring IVAs, for some time, especially as the regulation of them may tighten up following a recent RBS court victory against an IVA provider.

Aside from IVAs, DROs and bankruptcies have remained fairly stable each quarter during the past few financial years.

Michael Mulligan, insolvency and restructuring partner at law firm Shakespeare Martineau, said: “The decrease in insolvencies is unexpected news but it’s crucial to note that these figures are likely skewed by individuals, insolvency practitioners and the courts being unable to report from around mid-March due to lockdown measures.

“Therefore, the start of the COVID-19 pandemic was not represented in the figures for Q1, and this is simply the calm before the storm.

Duncan Swift, up until recently the president of insolvency and restructuring trade body R3, acknowledged that the decline was surprising, given the issues consumer were facing at the beginning of 2020. “Many people are just one change in circumstances away from being unable to keep on top of their debts,” he said, adding: “Illness, a relationship breakup, a reduction in hours at work or the threat of job loss can all be devastating even in more ‘normal’ times, but the impact of coronavirus has made this underlying reality more visible.”

Alec Pillmoor, personal insolvency partner at insolvency and business advisory firm RSM, believes personal insolvencies will fall again in Q2.

He said this will be due to the amount of forbearance lenders are showing, but also because of another key factor, adding: “Anyone currently furloughed, or concerned for their future employment, would presently have great difficulty in putting forward a proposals for an IVA based on their future income.”

But RSM anticipates a rise towards the latter part of Q3 this year and lasting into Q1 of 2021.