On the 1st May 2009, the official 2009 Q1 insolvency figures were released by the Government’s Insolvency Service. The headline figure was that overall the total number of people declaring personal insolvency (bankruptcy or IVA) had increased by 19% over the same period in 2008. Given the current UK recession and credit crunch reducing people’s ability to re-mortgage their way out of debt, this increase is not surprising. However, worryingly, the real UK personal insolvency figures could be much worse.

The reason for this is that the figures only record official insolvency – those who have formally been declared bankrupt or entered into an IVA. The figures do not include people how are struggling with debt but are trying to resolve this through an informal Debt Management Plan.

A Debt Management Plan (or DMP) allows the person in debt to reduce the payments they make to each creditor to fit within a budget they can afford. However, the massive downside is that 100% of the debt still has to be repaid. This may take many years particularly as the debtor has no legal protection from additional interest or charges which may continue to be added.

Debt Management Plans are currently in favour with creditors. It is interesting to ask why this is. The commonly quoted reason is that Debt Management Plans offer the creditor a chance of getting all their money back. However, I believe the real reason is that the debt is officially still a debt and therefore an asset on the balance sheet. It does not have to be written off as it would with a bankruptcy or IVA.

Banks are putting huge pressure on people in debt to choose the DMP route rather than a formal IVA. This means that individuals with crippling debt problems are having their pain prolonged with no light at the end of the tunnel. The end result – government figures for debt look better and banks get their own way again. However, it’s the people in need of help who are being overlooked and pushed deeper into the underworld of unrecorded debt.