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Personal debt hits decade low

Published on:November 20, 2015Author:The Debt Advisor

Figures published today by the Insolvency Service show that personal insolvencies in England and Wales decreased again in the second quarter of this year to 18,866 a reduction of 29.3% on the same period 12 months ago. This figure comprises 3,944 bankruptcies, 5,832 debt relief orders (DROs), and 9,090 Individual Voluntary Arrangements (IVAs). Company liquidations in the second quarter of this year also decreased to 3,325, a 3.8% reduction on the previous quarter and 7.8% less than the same quarter in 2014.

Bev Budsworth, managing director of The Debt Advisor, commented: “Today’s continued decline in insolvencies, shows that personal insolvency is now at its lowest level since the third quarter of 2005 and corporate insolvency is also at its lowest level for since 2008. However, 2014 saw the highest total number of IVAs and, even though IVAs are down today, I expect to see them increase to a similar level this year as Financial Conduct Authority (FCA) regulations take hold and more and more people are moved on to IVAs from the hundreds of thousands of debt management plans.

“This is good news. Since it was introduced in 1986, the IVA has evolved into a viable and fair debt solution. The improvements to the process have been achieved through the introduction of a protocol in 2008 for straight forward consumer debt IVAs, which continues to be reviewed.”

In January 2014, a fourth version of the protocol was introduced. Since the introduction of the protocol in 2008, the major improvements have been:-

  • Bad behaviour by creditors and poor practitioners has been checked
  • IVA approval rates have increased
  • The protocol provides the supervising insolvency practitioners with more discretion to help debtors deal with income shocks or unforeseen problems during the IVA.

Bev continued: “Since the FCA took over the mantle of regulation of debt counselling in April 2014, the combined effort to make debt solutions ‘fit for purpose’ has made huge progress.”

Treating Customers Fairly

The FCA regulation is much tougher than the previous OFT regime which struggled with widespread non-compliance of the guidance on debt management as well as inappropriate advertising and lead generation.

Any debt solutions practices wishing to gain full FCA authorisation have had to significantly improve their compliance and quality control systems to ensure they can more easily prove customers are being appropriately advised on debt solutions in order to make them ‘debt free’ in a reasonable period of time.

Bev commented: “These Treating Customers Fairly (TCF) principles are designed to do exactly that, they are meant to ensure that people’s circumstances are constantly monitored to ensure that they are treated fairly and honestly and are given the right debt advice at the right time. In fact, an increasing amount of debt management companies are now deliberately converting people from debt management plans on to IVAs in order not to fall foul of the FCA quality assurance regulations.

“We are also seeing that creditors are more inclined to support IVAs even if it means that they would reclaim less of the debt than say, a bankruptcy order, simply because they don’t want the bad publicity.

“I believe that far too many people are simply languishing on long-term debt management plans that shouldn’t be there. The FCA has adopted most of the debt management protocol which was spearheaded by the Insolvency Service. This includes the need for debt management plans to clear debt in ten years, unless the customer can demonstrate that their circumstances are likely to change in that period and enable them to clear their debt.

Debt Relief Orders

The debt level for DROs will change in October this year from £15,000 to £20,000 which is likely to see them more widely used. The graph below shows how number of approved DROs have overtaken bankruptcy in the last two years.

Insolvencystats2015q2

Professionals in Debt

Despite GDP showing increased growth, increased competition, funding cuts and increased regulation have affected the potential earnings of many professionals including barristers and solicitors who are experiencing mounting pressure as agencies like HMRC adopt a tougher stance on tax collection.

Bev added: “The end of July will be crunch time for these professionals as their second tax bill is due. It will be a worrying time as many will struggle to pay this year’s tax bill and some won’t have even paid last year’s bill yet, hoping that they can put off the HMRC until their cash flow is a little rosier.

“We are increasingly seeing barristers and other legal professionals in large amounts of tax and VAT arrears, with many of them turning to personal loans, credit cards or even specialist business finance or ‘debtor funding’ to raise capital. Falling into tax arrears can be daunting and very stressful, but putting it off is not the answer, seeking professional advice at the earliest opportunity is the only sensible approach.”

Corporate Insolvency

The number of corporate insolvencies peaked at 25,633 in 2009 and, since then, have steadily declined to a total figure at the end of 2014 of 17,118. These figures included:

Liquidations
Creditors Voluntary

10,280

Compulsory

3,728

Other Insolvencies
Company Voluntary Arrangements

563

Receiverships

724

Administrations

1,823

Totals

17,118

Bev explained: “Today’s figures show the total number of corporate insolvencies were 3,908, down mainly due to a reduction in compulsory liquidations. When compared to the first quarter total of 4,052, it’s likely that corporate insolvencies will continue to decline this year to around 16,000. The decline can be attributed, in most part, to the recovering economy, however, there is an increasing number of companies with debts that are dissolved each year.

“Considering that there are more than 580,000 new companies set up each year and that companies have an average life span of two-and-a-half years, the number of formal insolvencies is very low.

“It is estimated that just short of 369,500 companies are dissolved each year. However, dissolution is only relevant for companies that have no debt and have not traded or changed their name in the last three months. There has been an unhealthy growth in directors applying to strike off companies in debt. Companies House provides a step by step guide to the striking off process and failure to follow this process, which includes sending notification to shareholders, employees and creditors, can mean a fine or possible prosecution.”