Personal insolvency figures are double that reported by the Insolvency Service

Official figures show 134,000 people were declared officially insolvent in 2009, a massive 26% increase on 2008. However the true number is likely to be closer to 300,000.

When an individual is insolvent, they are unable to maintain the regular payments towards their debts as originally agreed with their creditors.

The figures from the Insolvency Service report only formally registered insolvencies. These include individuals who have declared bankruptcy or undertaken individual voluntary arrangements (IVA) or debt relief orders (DRO) to resolve their debt problem.

That these figures have increased so significantly is a concern. However even more worrying is the fact that they are a gross underestimation of personal insolvency in England and Wales.

Debt management plans not recorded

By far the most popular method of resolving personal insolvency is a debt management plan. This is an informal, non legally binding agreement with creditors to reduce monthly debt repayments.

Debt management plans are used by many thousands of people each month to deal with their insolvency. Charities such as the Consumer Credit Counselling Service and the Citizens Advice Bureaux regularly recommend such plans.

The problem is that there is no official register of their use.

Anecdotal evidence from debt management companies suggest that for every IVA or bankruptcy that their insolvent client’s carry out, at least one other undertakes a debt management plan. For many, the ratio is two to one.

As such, it is highly likely that the number of insolvent individuals is currently increasing at a rate of at least 300,000 a year, double the figure reported by the insolvency service.

Knock on effect

People often choose to carry out debt management plans over IVAs or declaring bankruptcy because they are more flexible and do not require equity to be released from their homes.

However, unlike formal insolvency procedures, no debt is written off and the debt repayment term is often significantly extended.

The sheer numbers of people who are taking advantage of these plans has a knock on effect for consumers as a whole. Despite bank of England interest rates remaining at 0.5%, credit card companies and building societies are now increasing their lending rates across the board.

The explanation they give for this is the changed economic environment and the increasing risk they face from bad debts. Clearly banks and other lenders are not underestimating the scale of the potential insolvency problem.

No let up in 2010

Unfortunately the increase in the number of personal insolvencies is likely to continue to increase in 2010.

Employers remain under intense pressure and it is likely that many more will fail or have to shed jobs to survive over the next 12 months.

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Many individuals have been shielded from reductions in income because of low interest rates leading to cheaper mortgage payments. However, with these costs expected to start to rise in 2010 together with other increases such as VAT returning to its 17.5% level, the pressure on family finances can only get worse.

Personal insolvency is set to continue to be a very real problem in 2010. There is no reason to believe that the number of recorded insolvencies will not continue to climb.

Given the actual number of insolvent individuals is double the official figure (which is likely to be a conservative estimate), the real number could increase to 400,000 before the end of this year.

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