Personal insolvencies fall after record highs last year - but experts warn they could rise again quickly

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The number of people going insolvent between April and June has eased back from record highs last year, official figures show.

The Insolvency Service published insolvency statistics showing there were 22,772 individual insolvencies in the second quarter of 2017, a decrease of 9.7 per cent on the previous quarter, returning to the level seen in the second quarter of 2016.

According to the Insolvency Service, the latest figures published on Friday mean one in every 489 adults became insolvent over the past 12 months, a slight fall in comparison to the first-quarter rate of one in 486.

Dropping: 1 in every 489 adults became insolvent over the past 12 months

Personal insolvencies consist of bankruptcies, individual voluntary arrangements  and debt relief orders.

The second-quarter drop was driven by a 15.6 per cent fall to 12,854 in IVAs, which are agreements where money is shared out between creditors.

Individual insolvencies in England and Wales (quarterly data, seasonally adjusted)

DROs grew slightly to 6,146 quarter on quarter, while bankruptcies fell by 2.5 per cent to 3,772 over the period.

Focusing on the companies, 4,547 firms entered insolvency between April and June, expanding by 12.6 per cent in contrast to the first quarter.

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 Alec Pillmoor, a personal insolvency partner at RSM, believes that these relatively benign statistics may be masking future problems for households. 

He said: 'during periods of high employment and record low interest rates, you might expect insolvency levels to fall.'

Warning: Earlier this week, the Bank of England cautioned that while household debt can be dangerous in excess'

'In fact, whilst the fall in the number of personal insolvencies is to be welcomed, the fall in the headline rate may be masking future problems and there's a sense that we are experiencing the calm before the storm'.

'The inflation and GDP figures released this month now suggest that an increase in interest rates is unlikely until 2018, or the end of this year at the earliest, the increase in personal debt is concerning in the longer term'. 

'Alex Brazier from the Bank of England warned that while household debt is good in moderation, it can be dangerous in excess'.

'A positive to take from the statistics in the previous quarter was the increase in Individual Voluntary Arrangements which suggested that individuals were recognising that they had financial difficulties and are taking positive steps to resolve them'. 

'The reduction in the number of personal insolvencies this quarter is almost entirely due to a fall in IVAs. It is to be hoped that people are not burying their heads to financial problems and so storing up greater issues for the future'.

The rise was strengthened by a 'one off event', which saw 1,131 connected personal service companies (PSCs) enter creditors' voluntary liquidation (CVL) in response to changes to claimable expense rules.

Positive steps: An increase in Individual Voluntary Arrangements suggest individuals are recognising that they have financial difficulties

Stripping out the impact of the PSCs, company insolvencies dropped by 15.4 per cent over the period to a 17-year low.

The Insolvency Services said there were 3,454 CVLs in the second quarter, a 15 per cent rise in compulsory liquidations to 672 and 421 other insolvencies.  

Insolvency partner at chartered accountants HW Fisher & Company, Brian Johnson said the low interest rate had 'continued to flatter' the individual insolvency figures.

He said: 'Though number of people tipping into insolvency continues to fall, the insolvency rate has barely budged.

'At 0.2 per cent of the population it remains over double the level it was at for the two decades leading up to 2005.

Debt problems expected to increase 

Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, said:

'After several steep rises in recent quarters, this fall in insolvencies in the last quarter is welcome news. However, we should remember that insolvencies are still 21 percent higher than they were just two years ago. There is a significant risk that this long-term trend could continue. 

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'Household debt continues to surge, and a renewed squeeze on incomes is eating into budgets that in many cases are already stretched. We expect demand for free debt advice to continue to rise over the rest of 2017.

'I would urge anyone who is struggling with their commitments to seek free advice from a charity-run service like National Debtline as soon as possible.' 

'People unable to clear their debts now have a greater range of options open to them'

However, the fact remains that years of cheap credit have led thousands of people to rack up debts that they will quickly find unmanageable when, not if, interest rates rise.

'For now the sky appears clear but even a slight increase in interest rates could cause the debt storm to break.'

London's head of restructuring and insolvency at Freshfields Bruckhaus Deringer, Richard Tett, asksfor how much longer will these bad conditions last, and when conditions do change, will there be a bump?

'For now, lending conditions remain strong and default and insolvency rates and UK profit warnings are all very low - indeed, the underlying company insolvency rate is the lowest on record.

'The level and terms of the debt currently being taken on by companies are seen by some as concerning, with European leveraged debt issuance almost three times greater for the first half of 2017 than for 2016 over the same period.

'Separately, the markets are worried about signs of complacency around mounting consumer debt.'