As the number of personal insolvencies reaches record levels, with consumers battling against unemployment and credit problems, I say the total number of insolvencies for last year in the UK should have been nearer the million mark.

Figures released by the Insolvency Service show that the number of individuals in England and Wales who went bankrupt or proposed an Individual Voluntary Arrangement, (IVA) during 2009 reached 134,142, a massive increase of 27,598, this equates to a rise of 25.9%. This is the highest number of insolvencies since the Service started collating records back in 1960. See insolvency figures since records began.

However, research by R3 has revealed that around 700,000 ‘hidden debtors’, are in long term debt management plans some of whom have no hope of ever paying their debts back in their lifetime and  are technically insolvent. They are instead, languishing in long term informal repayment programmes with no debt, or for many, no interest relief.

I think this is just the tip of the iceberg as too many people have debts that they have no realistic hope of repaying. Some try to offer an IVA to their creditors only for it to be rejected by a lender. There is also the issue of the cost for a person to go bankrupt, currently £510 or £360 if on certain benefits. I have many clients that just cannot afford to go bankrupt, are no longer paying their lenders, and the debt, pressure and stress is building everyday.

Also included in the figures are Debt Relief Orders, (DROs), which were introduced by the Government in April 2009. A DRO is designed to allow those with debts of less than £15,000 and minimal assets to write off their debts without entering into a full blown bankruptcy or having to go to Court. These are proving to only help a selected few and are totally ineffective in helping consumers because of the ridiculous and unreasonable qualifying procedure; still they work for some as 11,831 have been issued since their inception.

Insolvency involves an individual either going or being made bankrupt or successfully proposing an IVA, which is seen as a less stringent form of insolvency. An IVA allows a borrower to enter into a repayment programme, usually for 5 years, and interest and charges are frozen with the remaining debt written off upon completion of the arrangement.

Even in a bankruptcy the individual is still expected to make payments to his or her creditors if they are deemed able to afford it, this being for a period of three years as against five years in the IVA.

Over the past decade this country’s economy has been fuelled by around 1.5 trillion pounds of consumer borrowing. We have been encouraged to spend and pay later through slick marketing and the easy availability of credit and from this we have developed a culture of ‘must have now’ whereby millions of consumers have become burdened with unmanageable debt.

This has been recognised by the government and we expect to hear in February from the Ministry of Justice (MoJ) whether the debt management industry is to be regulated, something which I would support.  More importantly there may be a ‘new regulated debt management plan’. Whether this will entail debt relief and whether interest and associated charges are to be frozen has yet to be decided.

When all other options of repayment have been considered or exhausted and are no longer viable for the borrower then bankruptcy, as a final solution, will sort out the debts once and for all. Unfortunately some firms that operate in the debt management industry will tend to steer clients away from this option because they do not normally earn a fee.  These firms need to cover their overheads and I know of numerous cases where the borrower has been put off bankruptcy or talked out of it  into a fee earning option for this reason.

A recent report highlighted the top two reasons that put consumers off from going bankrupt, even though they have no other option available. The first was having to attend court to file for bankruptcy and the second to have one’s name and address inserted in the local paper for all the gossipmongers to feed on.

On April 6th last year the Insolvency Service removed the mandatory requirement to advertise someone’s bankruptcy in the local paper. This massive change in bankruptcy policy, which regrettably has received little media attention, could impact on future insolvency figures because of the fear of having one’s name and address inserted in the local paper has been removed.

The next major change under consideration is the removal of the requirement for the bankrupt to attend court to file for bankruptcy; instead this will be done on-line. I recently spoke with the Insolvency Service and they informed me that this would not be introduced this year as it is still under review.

Some will argue that we need to have publicity in all cases of bankruptcy and that this change is making it all too easy for those in debt. I disagree as I see the pain and suffering of those who have lost control and the ability to repay. Instead they are plagued by debt collectors and harassed to pay monies they do not have, they become ill, depressed and often turn to alcohol, crime or gambling. That aside, the move to stop the advertisement of one’s name and address in the paper and need to attend court is designed to save costs as advertising costs are around £200 - £300 per insertion as well as the additional time and resource costs of court staff.

My forecast for 2010 is for insolvencies to peak at around 165,000, which dwarfs the numbers for the preceding year. I was just 4,142 (under estimated) out on my forecast for 2009.

Someone that has been bankrupt, even after discharge, has no credit facilities, no overdrafts, no credit card and no credit file. We are fast moving towards a cashless society so who gives a thought about those that have had financial difficulties and how they are meant to cope?  Some of these people could be the seeds of social unrest so we need to support them and help manage and rebuild their lives.

Perhaps it is some of those that can pay their debts who are having a problem in accepting that the stigma of bankruptcy is fast disappearing and that a different view on it will be taken in future. Creditors in particular need to wake up and listen and support borrowers that are prime candidates for bankruptcy.

Remember, the last debtors’ prison shut in 1869, some 141 years ago. It is not a crime to be in debt, and something I insist on is that those who are should be treated with respect!

A note for the etymologists amongst you, the word bankrupt originates from the Italian ‘banca rotta’ a broken bench and arrived in English around the 16^th Century via the equivalent French form of ‘banqueroute’. In the Italian scenario a money dealer’s table was often referred to as a bench and when an Italian money trader became insolvent, his table was broken.

You can also hear Mike's comments on the insolvency figures on the following shows: 

BBC Essex 5 Feb 2010 - Insolvency figures.

BBC Three Counties 5 Feb 2010 - Insolvency figures.

BBC Essex 8 Feb 2010 - Debt collection agency harassment.