More People Avoid Insolvency

The amount of individual insolvencies has, contrary to common believes and despite the credit crunch, declined. The fall is the first in ten years but the figures are however believed to rise again in 2008.

In the last quarter of 2007 there were 24,846 individual insolvencies in England and Wales, reports the Insolvency Service. This was a decrease of more than 16 per cent on the same period last year and a decrease of 3.9 per cent since the previous quarter.

Over the whole year of 2007 individual insolvencies were 0.6 per cent less than the year before. The total number of insolvencies in 2007 was 106,645. Among them 64,480 were bankruptcy orders and 42,165 were Individual Voluntary Agreements (IVAs), which is a deal between the insolvent and the creditors, overseen by an insolvency practioner.

The number of bankruptcy orders increased slightly while the IVAs were down almost 5 per cent from 2006. The number of IVAs set up in the final quarter of 2007 was down 8.3% on the previous quarter, and showed a massive 27.3% decrease on the same period of the previous year.

The rise in bankruptcies and the fall in IVAs are thought to be due to lenders being less willing to carry out the agreements, since they have lost a lot of money through them previously. Some lenders have introduced a quota of how many IVAs they set up each year, leading to many people being denied IVAs and have to go for bankruptcy instead. Bankruptcy is the traditional way of escaping debts. Persons going in to it are likely to loose all their assets and a bankruptcy ends after on year. IVAs are normally an easier way to deal with debts. The insolvent re-pays his debts over a number of years and is less likely to loose his home.

Since 1997 the numbers of insolvencies have increased in England and Whales and massively in the last years. That could be one explanation to last years decrease; it takes the numbers back to where they were in 2005.

Although the insolvencies sank in 2007, many now predicts that they will rise again in 2008. Among them is PricewaterhouseCoopers (PWC), which predicts in a report entitled Precious Plastic that when people can’t afford to pay their higher mortgage interest rates they will start to build up credit card debts.

“We have witnessed a fall in the number of IVAs and bankruptcies, however, PWC currently believes that there is insufficient evidence to confirm whether the long-term trend is now downwards. There could be a spike in personal insolvencies next year as a result of over-borrowing by consumers,” said the report's authors.

It further said that the declining trend in IVAs in the recent quarters is partly due to a hindrance in the processing of IVAs due to ongoing fee discussions between banks and insolvency providers and partly due to flat levels of unsecured debt in the past two years.

Pat Boyden, of PWC, said to BBC that a predicted squeeze on household budgets could lead to a small wave of insolvencies later this year.

"In the past people have borrowed their way out, but as the housing market becomes static this will be increasingly difficult," he said.

PWC is not alone in its warnings, Howard Archer, chief UK economist at Global Insight, also warns that the decrease will only be temporary, "Those with the weakest credit ratings will be increasingly hit by tighter lending conditions and more punitive terms. Furthermore, the full effect of the marked overall increase in interest rates since August 2006 is still feeding through, with a substantial number of homeowners now seeing their mortgage bills rise markedly as the cheap fixed rates that they took out in the second half of 2005 expire," he said to the Guardian.