Number of people declaring bankruptcy falls 8 November 2010
James Falla (about the author)

The official number of people declaring themselves insolvent in England and Wales has fallen by 3.7%. Does this mean that the effects of the recession on personal finances are finally behind us?

The Insolvency Service has produced their quarterly insolvency report which shows that 33,935 people declared themselves officially insolvent in the third quarter of 2010.

The figures are made up of those who have declared themselves bankrupt, or have started a Debt Relief Order (DRO) or Individual Voluntary Arrangement (IVA).

The figures seem encouraging as they have fallen 3.7 percent compared to the same quarter in 2009. They also fell nearly 2.5% compared to the previous quarter.

Unexpected figures

However, the figures are at odds with other reports in the media of government cuts, a rising cost of living and reducing numbers of job opportunities.

In such an environment, surely one would expect a rise in the number of people with personal financial difficulties.

One explanation is that the official insolvency figures do not record all everyone who is insolvent.

Hundreds of thousands of people each year find themselves in a position where they cannot pay their debts but use an informal debt management plan (DMP) to deal with problem.

Thousands unofficially insolvent

People using DMPs are just as insolvent as those declaring bankruptcy or undertaking IVAs. However, there are simply no official records of the numbers of people entering into these plans.

Beat My Debt estimates that for every person declaring themselves bankruptcy or in an IVA, there are probably 3-4 starting DMPs.

Debt charities such as the CCCS and CAB say they have never been busier. Given that these organisations favour debt management plans, it could well be a fair assumption that the number of insolvent individuals is actually increasing.

Even if this were not the case, we can be sure that the number of people who are personally insolvent in England and Wales is certainly far higher than the official figures suggest.

Future problems

Perhaps more worrying is the future picture. With VAT due to increase to 20 percent in January, the cost of living will continue to rise. People who are struggling with debts but just managing to keep their heads above water could well be pushed under.

In addition the big worry is interest rates. When they eventually do increase, the cost of thousands of home mortgages will also go up.

According to figures from the Council of Mortgage Lenders (CML), if mortgage rates rose by just 2 percentage points from their current rate, about 2.9 million homeowners would not be affordable according to the FSA guidelines.

Many people will simply not be able to afford this increase and find themselves in a position where they are no longer able to pay their debts.

Act to protect property

This does not necessarily mean that homes will be repossessed. Solutions such as a debt management plan or IVA can protect mortgage payments while reducing the cost of other unsecured debts so that the risk of repossession is minimised.

Despite the recent figures, the number of people in a position where they are unable to pay their debt is still presents a huge problem.

It does not look like things are going to become any easier during the next twelve months. And if interest rates do start to rise, the problems could escalate significantly.

In this environment, it is more important than ever that people anticipate financial difficulty and start making plans to deal with it. If you feel that you are currently struggling with debt, getting advice early can prevent a difficult situation from turning into total financial disaster.

If you are struggling with debt, visit www.beatmydebt.com

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