The latest figures from the Government’s Insolvency Service suggest we’ve turned a corner, but perhaps it’s not the obvious one.
Look at this first graph. Total personal insolvencies are down. OK, they are still roughly twice as high as they were ten years ago, but they have fallen a long way from their peak in 2010. They look like they may be flattening out.
I guess they may have further to fall but I’ve a feeling that, when we look back at the time of the 2020 General Election, we may see that they have never gone back to the much lower levels of the early 2000’s. In fact, if Britons know what’s good for them they’ll rise – and by a lot.
Why? We think more people are prepared to deal with their debt, that debt management plans (even the free ones arranged by organisations like StepChange, National Debt Line and The Debt Counsellors) are on their way out and that a combination of insolvency procedures will provide the best and most certain way for cash-strapped Britons to solve their debt problems.
Dealing with debt
Recent research from the Money Advice Service (MAS) shows that only around one in five of the 8.8 million Britons with debt problems are doing anything about them. However, the chart above clearly shows that a higher proportion of people are dealing with debt than was the case in 2005 and before.
This isn’t likely to change and, thanks to the excellent work done in this area by MAS, the base level of people seeking debt advice could well go up. Potentially, it could quintuple, but people are still very unwilling to deal with their debt so that’s hardly likely.
Death of the Debt Management Plan?
There will always be a place for informal arrangements with creditors, especially for people who have a very realistic prospect of short-term positive changes in their financial situation, but their heyday has past.
Look at the second graph. Bankruptcies are sliding out of use and the Individual Voluntary Arrangement (IVA) continues to be the most used personal insolvency procedure (even if numbers have dropped from 2014’s peak, IVAs still account for at least half of all personal insolvencies).
Here at ClearDebt we have championed the low contribution IVA (monthly contributions of £70 and up) – we were the first to introduce it and now they account for around half of all IVAs. This means that a debt solution with certainty, freezing interest and charges from day one, is now available to almost anyone who doesn’t qualify for a Debt Relief Order (DRO) provided that the IVA is the most appropriate solution for that person.
IVAs and DROs will be better for most debtors
The IVA as an insolvency solution will be better for most debtors than a Debt Management Plan (DMP), where there is often little certainty of an interest freeze and where the time to pay is usually longer (often many years longer) than it is in an IVA, for example (the DRO is available for those whose monthly disposable income is less than £50 and certain other criteria is met).
So, there is now little reason for debtors to seek a DMP. Even if they don’t pay fees for their DMP, insolvency solutions are often likely to last a much shorter time and cost the debtor far less (this isn’t guaranteed – everyone needs to get specific advice on their own situation).
As people understand that a DMP is a far less certain and useful option than formal insolvency, so DMP numbers will drop, and I suspect a big factor in that will be the inexorable rise of the DRO.
More poorer people need help
Look at the third chart. This shows (in percent) how the mix of insolvency procedures has changed over the years. Whilst IVAs are the most used (and look set to stay that way), the biggest increase is in DROs and the trend looks like it’s up. Why have they become so important? Well, it’s partly because they are a more affordable procedure than bankruptcy and it’s partly because the nature of people seeking insolvency help is changing.
DROs are only available to people with lower debts and lower disposable incomes. Part of the rise in DRO use could well be due to the rise in working families whose benefits have been cut during the current austerity drive.
We are certainly seeing that in IVAs there are plenty of people with benefits as a component of income who are succeeding in dealing with their debt.
DROs are changing
From 1st October 2015 DRO debt limits will rise from £15,000 to £20,000, enabling more people with low level debt to use DROs instead of the more expensive and onerous bankruptcy process. So, from October on, we expect to see DRO figures soar.
Our view is that most people will find that a DRO or an IVA is the most suitable debt solution for them. Bankruptcies will still play a small part, but the great, hidden market of DMPs – free or not – will become a less and less useful option and maybe, just maybe, more people will start dealing with their debt. What do you think? Share your thoughts and opinions in the comments below.
Data sources:Insolvency Statistics: January to March 2015