Personal insolvencies continue to rise

Latest quarterly figures from the Insolvency Service for England & Wales have indicated that personal insolvencies saw a quarterly decrease, but rose by 6.5% from the same time last year.

Analysis of the figures showed that there were 28,946 seasonally adjusted personal insolvencies in Q2 2022, a decrease of 10.1% compared to Q1 2021’s figures of 32,197 and an increase of 6.5% compared to Q2 2021 (27,179).

Individual voluntary arrangements (IVAs) were the most common individual insolvency procedure (75% of cases), followed by DROs (20% of cases) and bankruptcies (6% of cases). IVAs make up a larger proportion of individual insolvencies than in the past and bankruptcies a much smaller proportion. Five years ago, IVAs made up 60% of individual insolvencies, compared to 25% for DROs and 15% for bankruptcies, while ten years ago, 43% of individual insolvencies were IVAs, compared to 28% for DROs and 29% for bankruptcies.

IVA numbers were down 10% on the previous quarter but remain above the rolling 6-quarterly average and rose by 5% when compared to the same quarter in 2021. In a break from the recent norm, DRO numbers fell for the first quarter in six; albeit they too rose when compared to the same quarter last year.

Bankruptcy numbers continue to decline with a decrease in numbers for the sixth successive quarter and the lowest quarterly total in 35 years. After seasonal adjustment, the number of bankruptcies registered in Q2 2022 decreased by 6% from the previous quarter and by 31% from the same quarter last year.

The number of bankruptcies was the lowest since the start of the seasonally adjusted time series in 1987 and the non-seasonally adjusted number was the lowest for Q2 since 1985.

The bankruptcies consisted of 1,406 debtors’ applications, which was 3% lower than Q1 2022 and 33% lower than Q2 2021, 266 creditors’ petitions, which was 2% higher than Q1 2022 but 8% lower than Q2 2021.

84% of bankruptcies resulted from debtor applications. This is lower than the proportion seen in previous quarters during the COVID-19 pandemic (approx 90%), but is similar to pre-pandemic values of 75-85%. The numbers of debtors’ applications and creditors’ petitions were both amongst the lowest seen since 1998 when data on petition type started to be captured.

The number of DROs decreased by 13% in Q2 2022 compared with the previous quarter, but was 32% higher than in the same quarter last year.

Between 4th May 2021 (when the scheme was launched) and 30th June 2022 there were 75,385 breathing space registrations. These were comprised of 74,177 standard breathing space registrations and 1,208 mental health crisis breathing space registrations (for those receiving mental health crisis treatment).

Commenting on the figures Christina Fitzgerald, President of insolvency and restructuring trade body R3 said “The quarterly fall in personal insolvencies is down to a reduction in bankruptcies, Debt Relief Orders (DROs) and Individual Voluntary Arrangements (IVAs). However, personal insolvency levels are still higher than they were a year ago.”

“DRO figures have increased by 32% from the same time last year – and this has been mirrored by a 31% reduction in bankruptcies, which suggests that those with lower levels of debt and assets are facing the pinch at the moment, rather than those with businesses and larger mortgages, who are more likely to use the bankruptcy process to deal with their financial problems.”

“With inflation continuing to climb and the energy price cap due to rise again in October, people are rightfully concerned about their finances and are managing their budgets accordingly.”

“But price increases across the board mean that the impacts are being felt differently by different types of consumers. For those on the lower end of the income scale, budgeting can only stretch so far and it is worrying that for some, credit cards and other types of debt may feel like the only option to cover even the essentials.

“Indeed, with little sign of inflation abating any time soon, and with the energy price cap due to rise again in October to a predicted £3,244– keeping only a small lid on hugely inflated prices – the winter months are likely to be very tough for many individuals and families across the country. Many more may be forced to consider an insolvency option to help resolve their financial issues.”

“Talking about money problems is hard, but my advice to anyone that is worried about their financial position is to seek advice as soon as they can. R3 members will usually give free initial advice to anyone struggling to pay their debts and by starting the conversation early, they will have the most options available to them to get a handle on the situation.”

Andy Nalliah, Personal Insolvency Partner at RSM UK said “Despite the 10% reduction in IVA registrations in the period, numbers remain high when compared to recent quarters and Q2 registrations produced the fourth highest quarter on record. That the top four quarters for IVA registrations have arisen in the last two years (two in 2020 and the two quarters of 2022) suggests debtors are more aware than ever of their financial positions and equally proactive in ensuring they remain in control and avoid bankruptcy. Whether this remains the case as creditors begin to apply more pressure remains to be seen.”

“Whilst IVA figures were the fifth highest on record, the bankruptcy numbers of 1,596 were the lowest on record since records commenced in 1987. Furthermore, and just as significantly, the 1,596 bankruptcies in the quarter represents a 31% drop on the same quarter last year and an 6% drop on Q1 2022.”

“The Insolvency Service report that of the 1,596 bankruptcies in the quarter, only 16% have arisen because of creditor petitions. This low percentage follows the post-pandemic trend and is consistent with the IVA registration levels.”

“However, as interest rates and consumer prices rise continue to rise, the pressure on debtors will only increase, negatively affecting the levels of discretionary funds in households and the reserves of debtors to make good on debts and compromise. This in turn could provide an obstacle for debtors in meeting the terms of contribution based IVAs. Consequently, I would expect to see the number of bankruptcies, particularly those arising from creditor petitions, begin to climb later this year as creditors re-evaluate their policies as regards credit and debt recovery.”

“Whilst DRO numbers remain high, the recent trend of quarter-on-quarter increases has stalled for the first quarter in six. Regardless, the quarterly number of 5,772 registrations still represents a 32% increase on the same quarter last year. This can however be explained by the increase in the eligibility thresholds last summer which per the Insolvency Service, has enabled an additional 8,628 debtors to enter a DRO in the 12 month period to 30 June 2022.”

Paul Rouse, Partner at Mazars said “Ramping up interest rates to slow surging inflation is the kind of strong medicine that is inevitably going to lead to more bankruptcies. At some point the dam will break – it’s only a question of when.”

“The number of people paying higher interest rates on their mortgages is rising daily as fixed rate mortgages taken out at lower rates start to come to an end. Personal insolvencies are likely to increase as the cost of managing debt increases and eats into people’s cash reserves – if they have any.”

“HMRC have also indicated that they are no longer able to exercise forbearance towards tax debtors as they switch their focus to improving public finances. This will ultimately lead to more insolvencies as HMRC increases pressure on debtors struggling with unpaid tax bills.”

“Having shown a considerable degree of forbearance during the pandemic, HMRC’s priority is now shifting to balancing the books. That is bad news for people behind on paying their taxes. They are likely to find themselves under more pressure to pay up.”

“People struggling with their finances should bear in mind that their chances of a positive resolution are greatly increased if they take action early and come to an arrangement with their creditors. Ignoring the problem and hoping it will go away will always lead to the worst outcome.”