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INSOLVENCIES ON THE RISE AGAIN

Published on:August 2, 2013Author:The Debt Advisor

Figures published today by the Insolvency Service show that company liquidations in England and Wales in the second quarter of this year were up 10.5% on the previous quarter but down 2.1% on the same quarter in 2012. Personal insolvencies also increased in the second quarter 2013 to 25,717 but were 6.1% less than the same period 12 months ago.

Bev Budsworth, managing director of multi award-winning The Debt Advisor said: “Despite today’s statistics, it does seem that the economy is ‘on the mend’, as the chancellor put it. Both personal and corporate insolvencies are up, which is a worry as it proves there are still tens of thousands of families and businesses who continue to face real financial hardship with rising prices, benefit cuts and a painfully sluggish economy.”

‘Green shoots’

“It can be natural to see a shaky recovery from a recession, especially in corporate insolvencies but I think we can say that we are finally starting to see the ‘green shoots’ of growth in the economy. However, output is still more than 3% below its pre-recession peak so we cannot afford to be complacent.

“An increase of 10.5% shows that the business is still volatile. It’s all about confidence at the moment; our confidence to spend and the banks’ confidence to lend. We have to support our local High Street as our retailers, especially our independents, are still losing out. Even those with an online presence are still finding it really tough with profits squeezed and sales down.”

A recent report from the Centre for Retail Research (CRR) has suggested that up to 20% or as many as 62,000 shops could close down in the next five years, and that the level of online purchases would double to 22% in the same period. Bev commented: “This proves my point; if we want to continue to have a vibrant High Street to shop in, we need to support it.

“What is perhaps more worrying is that, according to the CRR, nearly 40 retailers have gone to the wall up to mid-July, affecting over 21,000 staff, which is already over two-thirds of the total amount we saw last year.

“We are even seeing SMEs generating increasing levels of personal debt just to prop up their businesses. Their credit rating has dropped to such a degree that they are unable to get a business loan in order to buy stock in order to benefit from a growing economy – it really is a vicious circle!

“SMEs are our lifeblood, they employ over 14 million people and turned over £1,500 billion; nearly half of all private sector turnover. Only by growing this grass roots sector will we breathe life back into our economy and see sustained levels of growth.”

Natural phenomenon

Bev continued: “We mustn’t forget that failure is a natural phenomenon and an everyday part of business, regardless of the economic climate. A large proportion of companies experience a decline in turnover or even fail in the first 12 months.

“Banks are lending, in fact we’ve just seen our biggest rise for two years with SMEs borrowing over £170 billion in June alone. Businesses need to play their part to secure funding. A business that does not have a clear strategy or growth plan is unlikely to attract investment from any financial institution.”

Personal insolvency

Bev continued: “Personal insolvency was also up around 2.8% on the last quarter but down over 6% on the same period a year ago – which is encouraging as it shows a general downward trend. Bankruptcy is down primarily because the cost of making yourself bankrupt of £750 deters many from taking this step. The Insolvency Service has issued a number of consultations on simplifying the process for individuals to make themselves bankrupt by removing the courts involvement. Whilst there was much support for this, it will require legislative changes which don’t look like happening soon.”

Zombie debtors

Bev added: “The numbers opting for Individual Voluntary Arrangements (IVAs) was 12,116 for the quarter, a figure that is up slightly but one that has remained relatively consistent since 2007. However, the big change we have seen is the actual amount people are contributing.

“In 2007, the average contribution to an IVA was around £350, however, in 2013, that figure had dropped nearly 50% to around £200.

“Our research of IVA cases over the last 18 months with contributions under £200 has shown that at least 50% are homeowners aged 30-40 with at least one dependent. These so-called ‘zombie debtors’ have an average debt of around £40,000 with little or no way of changing their financial situation anytime soon. These families deserve our help and the IVA is the perfect solution for people in significant debt and dwindling disposable income.

“The IVA is a viable workable debt solution which is much needed to ensure that we can recycle those with serious levels of debt. The problem is lenders are irritated by debt solution practices putting forward IVAs with contributions of less than £100 and debts of less than £10,000. There are other, more appropriate, solutions for lower levels of debt. Again, actions by a few in the industry are potentially jeopardising a great rescue tool which works well for those who have serious levels of debt they simply cannot repay.

“Banks are threatening to further reduce the nominee’s fee that practitioners charge to set up the IVA. This could slash in half the nominee’s fee which would mean the IVA solution becomes unworkable for those people who need it most. Practitioners around the country, like myself, are working hard to make sure that the IVA remains a rescue solution that is ‘fit for purpose’.”

The figures from the Insolvency Service consisted of 12,116 Individual Voluntary Arrangements, an increase of 6.8% on the corresponding quarter in 2012, 6,469 bankruptcies, representing a decrease of 20.1% on the corresponding quarter of 2012 and 7,132 Debt Relief Orders, also down 10.4% on the corresponding quarter in 2012.