People going Bankrupt falls during 2013
- 28 Oct 2021
Recent Insolvency Service figures show a considerable reduction in the number of people declaring themselves bankrupt in 2013. The numbers fell nearly 23% from 31,787 to 24,536.
One the face of it this fall is very good news. It suggests that the economy is recovering and less people are suffering with debt problems. However the number of people who started an IVA actually increased by 5%. In the face of an improving economic situation why is this?
Is the Cost of Bankruptcy putting people off?
One of the main issues facing people who want to go bankrupt is the up-front cost. This is a significant barrier for people who are already struggling financially. It is the reason why many people consider alternative solutions although Bankruptcy might be the best for them.
It might be possible for people to save up the money required to pay the fee. However the only way to do this is to stop making all other payments toward their debts for a number of months. As a result they will have to deal with considerable pressure from the creditors collections departments.
As such an easier option is to actually avoid Bankruptcy altogether and opt for an Individual Voluntary Arrangement (IVA). This is free to set up and the acceptance criteria in terms of the level of ongoing monthly payments have significantly reduced in the last 12 to 18 months.
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Are the criteria for a Debt Relief Order to strict?
People who are unable to pay the cost of bankruptcy can consider an alternative solution called a Debt Relief Order (DRO). This works in a similar way to bankruptcy and was designed with people who have low incomes in mind. There is still an up-front cost but at £90 per person this is far more affordable than bankruptcy.
However over the past year the number of people starting DROs has also fallen. One of the possible reasons for this is that the criteria that must be met are preventing people from using the solution who would otherwise do so.
The things that prevent people starting a DRO is that their total debt must be less than £15,000 and the amount they are able to pay towards their debt each month must be less than £50. Homeowners are not allowed to use the solution.
There are a huge number of people who are struggling with debt of less than £15,000 but who are trapped because they are able to pay just a little more than £50 per month towards their debt. They are therefore barred from the DRO but it will take them many months to save for bankruptcy. As such they are turning to the IVA solution.
If bankruptcy was more affordable would the debt figures have fallen?
Of course this is an extremely difficult question to answer. It is possible that the Insolvency Services figures do give a true reflection that the number of people with debt problems is falling. However the fact that the number of people starting IVAs is increasing raises a challenge to that possibility.
The other thing to bear in mind is that the government figures do not show the whole picture because they do not included the number of people who start a DMP (Debt Management Plan). It is currently impossible to measure these numbers as the plans are informal and there is no formal record of who starts one.
Anecdotal evidence suggests that there has been no significant fall in the number of people starting DMPs in 2013 and indeed debt charities who provide them such as Step Change constantly report that they have never been busier. Like IVAs there is no charge to set up a DMP.
It is therefore possible that many people who have started a DMP would have been better off going bankrupt but have been prevented from doing so by the Court fees. As such perhaps the fall in the number of people going bankrupt gives a rather distorted picture of the state of individual finances in England and Wales.