Insolvencies drop by 6 per cent on last year

Some 6,469 bankruptcy orders were recorded in the second quarter of this year

There were 25,717 personal insolvencies in England and Wales in the second quarter of 2013, dropping by 6% on the same period a year ago but slightly up on a five-year low recorded in the previous quarter, Insolvency Service figures show.

Some 6,469 bankruptcy orders were recorded in the second quarter of this year, putting them one fifth lower than a year ago.

Bankruptcies are often seen as a "last resort" and their use has generally dropped off since the introduction of a newer type of insolvency called a debt relief order (DRO), which is aimed at people with lower levels of debt but no realistic prospect of paying it off.

Around one quarter of bankruptcy orders involve people who are self-employed, which is a bigger proportion compared with previous years due to a decline in cases involving people who are not traders, the Insolvency Service said.

The recent upturn in personal insolvencies was driven by a rise in individual voluntary arrangements (IVAs), which are agreements for people to pay back as much as they can into a pot which is shared out between creditors.

There were 12,116 IVAs recorded during the second quarter, marking a 9% increase on the first three months of 2013.

DROs, which are often dubbed "bankruptcy light", fell back to their lowest levels in more than two years. Their numbers dropped by 1% on the previous quarter, with 7,132 recorded.

The figures were released as a major report from Government-backed body the Money Advice Service (MAS) warned more than half of UK adults are struggling with their finances.

An estimated 26 million people are living on the edge, showing an increase of around nine million adults since similar research was carried out in 2006.

Alec Pillmoor, Baker Tilly's head of personal Insolvency, said the official figures mask the “very real financial struggle” that many families are still facing.

The figures do not include the number of people who have entered into debt management plans.

Mr Pillmoor said: “Inflation has been running at a higher level than the increase in earnings for the last three years.”

Matthew Chadwick, head of personal insolvency at accountancy firm BDO, said the fact that the quarterly figures are still close to their five-year low shows the “continuing resilience” of households struggling to balance their debts and outgoings.

He pointed to some positive signs on the horizon from news that confidence is returning to the housing market and the economy has been growing.

However, he cautioned that the recent increases seen in house prices could make it more attractive for creditors to pursue their debts more vigorously.

Low interest rates have helped borrowers to keep their costs down in the tough economy and last year saw the lowest annual number of personal insolvencies across England and Wales since 2008.

Mr Chadwick continued: “Government and the Bank of England will be reluctant to make drastic changes, so any increases in personal insolvency levels linked to interest rate rises are likely to be gradual.”

Phillip Sykes, deputy vice-president of insolvency trade body R3, said rules which often make it hard for people to enter a formal insolvency process should be changed.

IVAs do not have the same “fee barrier” as bankruptcies, but they need to be agreed by creditors, which is “easier said than done”, he said.

Mr Sykes said: “Frequently, insolvent individuals cannot afford the fees to enter bankruptcy, but they have too much debt or assets to qualify for alternatives like debt relief orders.

“This leaves the debtor caught in the middle, exposed to their creditors. Action needs to be taken by the Government to reduce the number of people in this situation by looking at payment by instalments for bankruptcy and amending the thresholds for entry into debt relief orders.”