Steep Increase in UK Bankruptcies

SUNDAY, FEBRUARY 05, 2006

There’s been another steep rise in UK bankruptcies in 2005. According to reported DTI figures [1, 2], almost 70,000 people were made insolvent in England and Wales last year – that’s the highest number in a single year since records began.

When we look at the picture on a quarterly basis, there were over 20,000 insolvencies in the final quarter of 2005; up 60% on the previous year.

People in the UK are struggling to pay their debts after years of rampant borrowing. Since personal debt crossed the £ 1 trillion threshold in 2004, there has been a consistent rise in the number of personal insolvencies.

There are a number of factors that have contributed to the steady growth of people becoming insolvent. Firstly, it’s self-evident that higher levels of debt will likely lead to an increased number of people running into financial problems. Secondly, the UK economy has slowed down since 2004, and many are feeling the pinch after a succession of interest rate rises.

However, another important factor in the record number of people becoming insolvent has been the changes in UK bankruptcy law due to the implementation of the Enterprise Act of 2002. The sections of the Act regarding individual insolvency were introduced in April 2004, and some say that these changes have made bankruptcy an “easy option”.

In the Act, the “penalty” period for which an individual has to wait before being discharged from bankruptcy was reduced from three years to just a year. At the same time Individual Voluntary Arrangements or IVA’s were offered as an alternative to bankruptcy. In an IVA agreement, individuals negotiate a monthly payment with their creditors, and the interest on their debts is frozen.

Many people in the UK are still unaware of the IVA agreement as a means to avoid bankruptcy. However, in the last quarter of 2005 there were nearly 7,000 IVA agreements. Of the number of total number of people who were declared insolvent, roughly a third of these took out an IVA rather than face bankruptcy – double the number in the same period last year.

Clearly, in the UK, awareness of the IVA option to bankruptcy is growing.