Credit, Collections & Insolvency News
The Insolvency Service has published the latest personal insolvency figure for England & Wales which indicates that the total numbers of insolvencies in Q1 2020 decreased when compared with the previous quarter and the same quarter in the previous year (Q1 2019).
The figures largely pre-date the Government lockdown and wider impact of the Coronavirus (COVID-19).
Total individual insolvencies in Q1 2020 decreased by 4% from Q4 2019 and decreased by 11% from the same quarter in the previous year.
In Q1 2020, there were a total of 27,849 individual insolvencies as a result of: 16,714 Individual Voluntary Arrangements (IVAs), 6,875 Debt Relief Orders (DROs) and 4,261 Bankruptcies.
The overall trend for all individual insolvencies continued to be driven by the volume of IVAs each quarter. The numbers of DROs and Bankruptcies have remained fairly stable each quarter during the past few financial years. However, Bankruptcies did increase in Q1 2020, when compared with both the previous quarter and the same quarter in the previous year
IVAs were the most common type of individual insolvency, accounting for 60% of cases, followed by DROs (25%) and bankruptcies (15%). Since Q2 2011, IVAs have been the most common individual insolvency type. This contrasts with bankruptcies (in particular, bankruptcies resulting from a debtor application) which decreased following the financial crisis and the introduction of DROs in 2009.
The decrease in individual insolvencies in Q1 2020 was driven by a fall in IVAs but was partially offset by a decrease in the number of bankruptcies while DROs remained flat in comparison to Q4 2019. IVAs decreased by 7% to 16,714, DROs increased by 0.1% to 6,785, and bankruptcies increased by 2.5% to 4,261. In comparison to the same quarter in 2019, IVAs decreased by 18%, DROs decreased by 3%, and bankruptcies decreased by 1%.
Duncan Swift, Past President of insolvency and restructuring trade body R3 said “A quarterly fall in personal insolvency numbers is surprising given the challenges consumers faced early on in 2020, and given the general upward trend in personal insolvencies since around 2015.
“However, the Insolvency Service has urged caution when looking at these statistics due to the disruption to normal insolvency processes caused by the coronavirus. It is notable that bankruptcies where the creditor has initiated the process – which requires a court hearing – have fallen to their lowest level in at least 10 years, but bankruptcies initiated by the person in debt – which can be processed entirely online, with no need for court involvement – are at their highest level since Q3 2014.”
“Even before the coronavirus hit, causing widespread economic turmoil, many people were in a precarious or distressed financial situation. Earnings had long lagged behind inflation, while R3 research from January 2020, when COVID-19 was only just making its way into the news, found that a fifth (21%) of adults in Britain said they had no savings at all at the moment.”
“Many people are just one change in circumstances away from being unable to keep on top of their debts. Illness, a relationship breakup, a reduction in hours at work or the threat of job loss can all be devastating even in more ‘normal’ times, but the impact of coronavirus has made this underlying reality more visible.”
“The support from Government to underpin employment through the furlough scheme and to replace lost income for the self-employed has helped many people stay afloat. However, the schemes do not cover everybody, and 80% of usual income for some people on furlough may not be enough to cover their outgoings if they were already finding budgeting a stretch. Many companies also made redundancies before the furlough scheme was announced, and unemployment is predicted to rise as a result of the coronavirus.”
“The current crisis is playing havoc with the ability of many to use their normal financial coping strategies. For example, people who look for marked-down food or cheaper brands in supermarkets may find these are unavailable, while advice to shop as infrequently as possible means they cannot rely on finding end-of-day bargains, if indeed they are able to leave their houses at all. The closure of schools means many parents and carers are having to find money for extra food for their children, although voucher schemes offered by some schools and nurseries offer a measure of relief.”
“It is vital to emphasise that people who are finding it tough to cope at the moment do not need to do so alone. There are many sources of advice and support available, and reaching out for help as soon as possible can only be a positive move. Just make sure that anyone offering advice is qualified and trustworthy, as – sadly – scammers tend to thrive in difficult times such as these.”
Alec Pillmoor, Personal Insolvency Partner at audit, tax and consulting firm RSM said “As expected, there has been a reduction in the total number of personal insolvencies, continuing the trend that we have seen since Q4 2018. Whilst the number of bankruptcies has remained broadly consistent over the last 18 months, the number of people entering into individual voluntary arrangements has reduced from Q4 2018 with a 27% reduction over that period.”
“Looking to the future, I anticipate that the number of personal insolvencies will fall again in Q2 2020. The reasons for this are twofold; firstly there is presently a general forbearance by lenders and other institutions due to the prevailing circumstances and, secondly, anyone that is currently furloughed, or concerned for their future employment would presently have great difficulty in putting forward a proposals for an IVA (individual voluntary arrangement) based on their future income. Additionally, it must be noted that the majority of bankruptcy petitions are not currently being heard by the court.”
“We anticipate that there will be an increase in the number of personal insolvencies towards the latter part of Q3 this year and lasting into Q1 of 2021. This is partly because many of the individuals who are currently struggling financially will have only had the process delayed by the forbearance of lenders. Further, we would expect two spikes, firstly as the lock-down is eased and some of the sole trader and partnerships find that their business models are no longer viable and they will unfortunately fail; and later when businesses have managed to retain their markets, some will inevitably over-trade to compensate for recent losses and have insufficient resources to pay for this level of trading.”
