A record number of people were declared insolvent in 2010, although the trend is down and corporate failures are also charting a more optimistic course. However, the prospects of higher unemployment and a rise in interest rates this year threaten to reverse those movements, experts say.
Some 135,089 individuals were declared bust last year, the Insolvency Service reported yesterday, up 0.7 per cent from 134,142 in 2009.
A smaller than expected rise in joblessness and forbearance by lenders and the tax authorities may have helped to limit the increase. In the last three months of 2010, the number of individual insolvencies was down 9.4 per cent on the period from July to September.
The number of individual insolvencies in the fourth quarter was the lowest since the first quarter of 2009 and was down from 33,935 in the third quarter of 2010 and a record high of 35,682 in the first quarter of 2010.
Howard Archer, the chief economist at Global Insight said: "The reality is that many people remain at risk, particularly if economic activity is muted and unemployment moves higher in 2011 as tighter fiscal policy increasingly bites.
"The substantial fiscal squeeze will increasingly hit public sector jobs and consumers' pockets, while households already face high unemployment, negative real wage growth and elevated debt levels. There will also be a lagged impact from the recession as likely relatively muted growth in 2011 will mean that many people who have lost their jobs will be unemployed for a long time".
Other observers have also spotted worrying underlying trends, especially on people entering the early stages of difficulty, before insolvency is declared. Chris Nutting, director of personal insolvency at KPMG, said: "While the headline figures from the Insolvency Service show that bankruptcy numbers are falling, there is still an increase in the overall number of people entering into a formal personal insolvency procedure.
"Our research shows that creditors are losing a staggering £20m a day from insolvencies. These losses are bound to affect new lending decisions and the cost of new credit."
Mr Nutting continued: "As the underlying problem continues to grow it is a shame that the recent cuts in public expenditure have affected such areas as free debt advice. This will undoubtedly increase the number of consumers who choose the wrong solution to their financial problems."
Bodies such as the Citizens Advice Bureau and Shelter have warned ministers that cuts to their funding and to the legal aid budget will put the services they provide to the most vulnerable in society at risk.
Company liquidations in England and Wales were also down on the quarter, but by less than for individuals – a fall of 0.2 per cent to 3,955. This took the number of company liquidations down to the lowest level since the spring of 2008. Overall company liquidations amounted to 16,045 in 2010, which was down 15.9 per cent from the record 19,077 in 2009.
The Bank of England's Monetary Policy Committee meets next week to discuss the next move on interest rates. While the general expectation is for no change, there is also a widespread assumption that rates will be higher by the end of the year, with obvious implications for heavily indebted households.
Insolvency in numbers
135,089 individuals declared bust last year by the Insolvency Service
£20m The amount creditors lose each day because of insolvencies, according to KPMG research
16,045 The number ofcompanies that went into liquidation last year