RSM is predicting that overall personal insolvency levels in the first quarter of this year will remain fairly flat versus the same period last year and the last quarter, although the proportion of Debt Relief Orders (DROs) – also known as ‘bankruptcy lite’ - could rise to their highest ever level.
Ahead of official figures published by the Insolvency Service on 29 April, the data from Tracker, RSM’s online early warning system, suggests that there were around 20,125 personal insolvencies in England and Wales in the first quarter of 2016, a slight drop of around three per cent over the same period last year.
These comprise around 3,900 bankruptcies, 9,500 Individual Voluntary Arrangements and 6,725 Debt Relief Orders. This could mean that Debt Relief Orders as a proportion of total personal insolvencies reached their highest quarterly level since DROs were first introduced in 2009.
Mark Sands, personal insolvency partner at RSM said:
‘While the number of personal insolvencies overall has remained broadly flat, the rise in the popularity of Debt Relief Orders can be largely explained by changes to eligibility criteria. Previously, only those with debts of below £15,000 could apply for a DRO, but new rules introduced in October last year have increased that amount to £20,000, meaning many more people can clear their debts using this route.
‘We expect to see a slight fall in the number of bankruptcies in the first quarter of this year versus the same period last year, reflecting a long term decline in bankruptcies generally. However, we anticipate that bankruptcies will now start to rise. There are two reasons for this. One is that HMRC is winning many cases against those who have entered into tax avoidance schemes.
Secondly, and more importantly, new changes introduced in April of this year have reduced the costs of entering bankruptcy, introduced flexible payment methods and dispensed with the requirement for debtors to attend court – thus removing much of the stigma associated with bankruptcy. We expect that these changes will encourage many more people to seek relief from problem debts using the bankruptcy route in the future.
‘Overall, credit conditions for consumers continue to be incredibly benign. Borrowers continue to enjoy record low interest rates and the most recent figures from the Bank of England show that unsecured lending has reached its highest growth rate since December 2005. Back then, the monthly interest rate for a £10K unsecured loan was around 7.3 per cent. Last month that had dropped to just 4.3 per cent according to Bank of England figures.
‘This recent surge in unsecured lending does raise questions over whether consumers are overborrowing. Only time will tell, but people considering a loan would do well to take sensible precautions to make sure they don’t get caught out. It’s always advisable for borrowers to work out their monthly budget and consider how they would cope with a change in circumstance, such as ill health, a reduction in income or a rise in interest rates by up to two percentage points.
Carrying out these types of personal ‘stress tests’ can really help people determine how much they can comfortably afford to borrow.’