Although seemingly providing a rare glimmer of hope in dire times, the Insolvency Service’s recent statistics may paint a slightly too positive picture of the UK’s debt situation, the Debt Advisory Line’s Craig Gedey has cautioned. Although the overall number in individual insolvencies had gone down, this didn’t necessarily mean that households were returning to the black again. Instead, a combination of new application criteria for alternative procedures to bankruptcy on the one hand as well as the high costs of a standard bankruptcy on the other meant that insolvency was simply being suppressed or replaced, rather than significantly curbed.
As the tri-monthly report indicated, the overall number of insolvencies in the UK had declined by eleven percent in the third quarter of 2011 compared to the same period a year earlier. Although there were still 30,219 individual insolvencies in England and Wales combined, households seemed to be finding ways to avoid fully-fledged bankruptcy. While this was a welcome feat in theory, it also meant that in many cases, individual insolvencies were simply being replaced with Individual Voluntary Agreements and Debt Relief Orders – which were severe procedures in their own right. The latter was additionally facilitated by recent government adjustments making it easier to be granted the chance to participate in a DRO scheme. Just how many of those currently participating in an IVA or DRO will prove capable of steering clear of bankruptcy in the long run still remains to be seen.
What’s more, there could well be a somewhat more prosaic explanation for the recent reduction in bankruptcies: Many people may simply be too poor or indebted to cough up the upfront £700 required to pay for the procedure. “We are getting a lot of calls and personal feedback from debtors telling us that they would love to find a suitable solution for their problems – but are unable to afford it“, according to Gedey, “Right now, a huge amount of households is only barely keeping their head above water but could go under any moment in case of a financial shock. So although the numbers provided by the Insolvency Service are certainly welcome, we strongly advise against regarding them as indicators of a turnaround.“
What’s more, bankruptcies were certainly no longer the ‘privilege’ of the working classes. If this trend should continue, Gedey said, reports might soon look a whole lot different: “The middle classes are the country’s foundation of stability. If the threat of bankruptcy reaches them as well, hard times are ahead of us.“