Credit crunch helps feed first increase in personal
insolvencies since 2006
The number of UK personal insolvencies has increased by 1.7% on
the previous quarter with 25,264 individuals entering into
bankruptcy or an IVA* (Individual Voluntary Arrangement) during the
first quarter of 2008. This quarter's figures represent a drop of
13.2% from the record highs in the same quarter last year
(29,116).
Figures issued today by the Insolvency Service and analysed by
Grant Thornton's Personal Insolvency practice show a slight
increase in IVAs from 9,218 to 9,614, a 4.3% jump, while
bankruptcies remained virtually unchanged at 15,651 (15,636 in Q4,
2007).
Mike Gerrard, a personal insolvency partner at Grant Thornton
says, "This latest increase in personal insolvencies shows the
financial strain being wrought on individuals from a combination of
high living costs and tighter lending conditions. It’s a tough year
to be struggling with debt."
However, Gerrard believes the worst is yet to come and points to
recent comments from Bank of England governor Mervyn King, who
expects the consumer price index to move past 3%, and the double
digit percentage increases in the price of food, fuel and utilities
over the past year as reason to believe that the numbers going
insolvent will increase later this year and into 2009.
"There is normally a lag between hard times and the numbers
going insolvent, so although some individuals showing up in the
latest insolvency figures will have done so because of financial
difficulties brought about by the global downturn, it won’t be
until later this year and early next that we will see the full
extent of the credit crunch on UK individuals."
He continues, "UK weekly earnings increased at a rate of 2.9%
from the previous year*, barely maintaining breathing room above
inflation (CPI) at 2.5%**, yet the cost of those things we
frequently spend money on such as electricity, fuel and food has
increased by more than 10% in less than a year***. Although these
factors are not solely responsible for making an individual
insolvent, they are often the ‘straw that breaks the camel’s back’
for someone in serious financial trouble."
Gerrard says the blame for the latest increase in insolvency
figures cannot be solely attributed to the current financial
climate, but he believes that tighter lending conditions and the
housing slump are having an increasingly noticeable effect on
insolvency numbers because they have stripped away the lifelines
have been typically used to keep insolvency proceedings at bay,
such as remortgaging and re-negotiating and extending credit
limits.
"Where once over-indebted individuals relied on remortgaging or
in more extreme cases extended limits on credit cards to stave off
bankruptcy, these methods have now been largely shut off because of
global financial pressure. This means insolvency proceedings become
a reality much quicker than they might have been in the past for
those with high levels of debt."
He concludes, "Life is always tough for those with serious debt
problems and the credit crunch is managing to amplify those
problems even more."
IVA uptake will mimic previous year, increasing further
in 2009
Mark Allen, head of IVAs at Grant Thornton, notes that IVAs have
increased for the first time in four quarters (up 4.3% to 9,614)
and he believes that they will reach similar numbers for 2008 as
they did in 2007 (approx. 42,000).
Allen also says that the use of IVAs could potentially increase
in 2009 when the effects of this year’s credit squeeze really
begins to show in the numbers going insolvent.
"This year’s debt problems will feed into next year’s IVAs and
it is likely that while money is tight, creditors will look
favourably on IVAs, if the protocols are followed, as it will allow
them to see quicker dividends and alignment costs when recovering
overdue debts."
Allen says that the IVA market will suffer some supply
restraints this year because "some of last year’s volume IVA
providers moved away from the volume market," but he believes other
providers will "step in to fill the gap."
*National Statistics ASHE 2007 Pay and earnings survey Nov 2007:
http://www.statistics.gov.uk/pdfdir/ashe1107.pdf
**National Statistics CPI/RPI inflation index March 2008:
http://www.statistics.gov.uk/CCI/nugget.asp?ID=19&Pos=1&ColRank=1&Rank=310
***Npower announced electricity prices for domestic customers to
rise by 12.7%, gas bills by 17.2% (Jan 08), British Gas (Centrica)
price rise of 15%, Jan 08, EDF (13% rise) Jan 08; Price of basic
supermarket groceries increased by 15 per cent in the past year
(Express, Jan 08; BBC, 5 March 08); AA monthly fuel price report
(April 07 & April 08)