Page last updated at 10:58 GMT, Friday, 6 November 2009

Personal insolvency rises by 28%

Cash, cards and bills
Debts have built up for some people during the downturn

A record number of people were declared insolvent in England and Wales in the third quarter of 2009, according to figures from the Insolvency Service.

There were 35,242 personal insolvencies, up 28% from the same period last year and an increase of 6.6% on the previous three months.

This extended the record number which was reported earlier this year.

But there was better news for business, with 4,716 company liquidations, down 4.7% quarter-on-quarter.

However, the number of businesses in England and Wales going bust in the third quarter of the year was still 14.6% higher than the same period a year ago.

Issues for individuals

The recession has been driving up the number of personal insolvencies since the end of 2007.

FORMS OF INSOLVENCY
Bankruptcy: The traditional way of escaping overwhelming debt. Ends after one year, but you are likely to lose all your assets including your house to pay something to the creditors
Individual voluntary arrangement (IVA): A deal between you and your creditors, overseen by an insolvency practitioner. Less stigma, less chance of losing your home, but involves paying some of your debts in one go or over a number of years
Debt Relief Orders: Introduced in April 2009, these allow consumers with debts of less than £15,000 and minimal assets or surplus income to write off debts without a full-blown bankruptcy

The record numbers are due in part to the number of people who have found themselves out of a job during the recession, but with debts to pay off.

This was coupled with the onset of the credit crunch, which drew back the amount of cheap credit available and meant some were unable to borrow their way out of immediate debt problems. The flat housing market also prevented them selling their homes, or drawing on equity.

There are various different options for insolvency - bankruptcy, individual voluntary arrangements (IVAs) and, since April, Debt Relief Orders (DROs).

The figures show that the bankruptcy option was chosen by 18,347 people, up 6.4% on the same quarter the previous year.

Another 12,390 chose IVAs, up 20.9%, and 4,505 chose DROs, up sharply on the last three months when they were available for the first time.

DROs are a new and cheaper form of insolvency procedure aimed at helping people wipe the slate clean if they have debts of less than £15,000 and few assets.

"These figures are overwhelming, but not surprising, and unfortunately the end is not in sight," said Louise Brittain, of accountancy firm Deloitte.

People facing spiralling debts are sometimes advised to sign up to a debt management plan, under which a set amount is repaid each month. However, these are not included in these figures.

"The statistics have further highlighted the growing debt problem in this country, but the real worry is that these are not even a true reflection of the actual debt burden in the UK," said Jessica Bown, of website talkaboutdebt.co.uk.

"Despite more debt management plans being taken out than any other debt solution there is no central system for registering them and they are not even included in the figures, meaning that this is potentially just the tip of the iceberg."

She added that the stigma attached to debt meant many people did not admit to having money problems.

Strain on business

The figures show that the number of compulsory liquidations of companies in England and Wales stood at 1,301 in the third quarter of the year, down 9.8% on the previous three months and down 12.9% on the same period in 2008.

Margins are still being squeezed and many companies are fighting for survival, with employees often the victims of essential cost cutting
Alan Tomlinson, Insolvency practitioner

There were also 3,415 creditors voluntary liquidations, down 2.6% on the previous quarter but up 30.2% on the same three months a year earlier.

However, these figures represent the very end of the process of a business being wound up.

Additionally, there were 1,578 other corporate insolvencies in the three months to September, which denotes the point at which a company is declared insolvent.

This was made up of 410 receiverships, 974 administrations and 194 company voluntary arrangements.

In total this was an increase of 9.3% on the same period a year ago, and a 3.2% increase on the previous three months.

There will be further strain when HM Revenue and Customs (HMRC) starts to apply pressure on businesses which are behind on tax, according to Alan Tomlinson, partner at licensed insolvency practitioners, Tomlinsons.

At present, HMRC was being co-operative in assisting companies that found themselves in difficulty, but this was only a short-term measure, he said.

"There is talk that the recession will technically end in the fourth quarter, but for some companies the recession will really hit home when the Revenue calls in its debts," he said.

"Margins are still being squeezed and many companies are fighting for survival, with employees often the victims of essential cost cutting."



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