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Rise in number of people going into 'bankruptcy light'

Published 29/04/2016

The Insolvency Service will publish figures showing the number of people going insolvent between January and March.
The Insolvency Service will publish figures showing the number of people going insolvent between January and March.

The number of people going into a type of personal insolvency known as "bankruptcy light" increased during the first three months of 2016, official figures show.

The Insolvency Service said 6,722 debt relief orders (DROs) were taken out between January and March across England and Wales - marking a 3.4% increase compared with the previous three months and 8.2% higher than the same period a year earlier.

The upswing was due to a change in the eligibility criteria for DROs in October 2015, its report said.

Previously, only people with debts below £15,000 could apply for a DRO but in October last year the limit was increased to £20,000, enabling more people to use DROs as an alternative to going bankrupt, which is often seen as a last resort.

The Insolvency Service said about a quarter of DROs in the first three months of 2016 involved debts above the previous threshold of £15,000.

The rise in DROs pushed the total number of personal insolvencies slightly higher in the first three months of this year compared with the previous quarter.

In total just over 20,380 people went insolvent between January and March - a 0.3% increase on the previous quarter but still 2.2% lower than the same period in 2015.

In the 12 months up to March, one in every 576 adults became insolvent - marking the lowest rate since 2005.

Sarah Albon, chief executive of the Insolvency Service, said: "Personal insolvencies are lower than a year ago. The change to eligibility criteria for debt relief orders, introduced in October, has enabled more people to get the solution that is right for them."

The figures also show there were 3,744 bankruptcy orders in the first three months of 2016 - marking the lowest quarterly figure since 1990.

Bankruptcy numbers were down by 0.7% on the previous quarter and down by 10.8% compared with a year earlier. Bankruptcy numbers have been on a general downward path in recent years, helped by low interest rates keeping borrowing costs cheap and the introduction of DROs as an alternative in 2009.

Individual voluntary arrangements (IVAs), where money is shared out between creditors, are the third type of personal insolvency.

Like bankruptcies, IVA numbers were also down, with 9,916 IVAs in the first quarter of 2016 - a 1.2% fall on the previous quarter and 5% lower than the same period a year earlier.

While personal insolvencies remain relatively low in the low interest rate environment, recent lending figures have prompted concerns that some people may be tempted into overstretching themselves financially.

Mark Sands, a personal insolvency partner at RSM, said: " Taking out a personal loan has hardly ever been so cheap and demand is rising...

"While taking on new debt at current low rates may seem very manageable at the outset, sudden shocks - such as those currently affecting employees in the steel industry or retail sector for example - can result in things getting very difficult very quickly indeed. Over time, we will see whether some borrowers are having too much of a good thing."

The figures also show that total company insolvencies increased across England and Wales in the first three months of 2016, mainly driven by an increase in compulsory liquidations - where a winding-up order is obtained from a court and a company is eventually killed off.

The Insolvency Service said an estimated 3,694 companies entered insolvency in the first quarter of 2016, which was 5.4% more than the previous quarter but 3.6% lower than the same period in 2015.

Compulsory liquidations increased for the first time since the first quarter of 2015. Some 804 companies were subject to a compulsory winding-up order in the first quarter of 2016 - marking a 36% leap on the previous quarter but 11.5% lower than the same period in 2015.

Phillip Sykes, president of insolvency trade body R3, said: "Following the recent administrations of BHS and Austin Reed, it will be interesting to see if the next quarter's insolvency figures show if these are just the tip of the iceberg of a wider problem on the high street, and if any job losses have an impact on the personal insolvency statistics."

He added it is important to bear in mind that the official figures do not cover the full extent of people struggling with debt. For example, the official figures do not cover debt management plans.

Mr Sykes said: "Serious indebtedness does remain a problem, even if it doesn't show up in the insolvency numbers. According to our latest 'personal debt snapshot' of 2,000 adults' personal finances, around two in five British adults say they are at least fairly concerned about their current level of debt."

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