Personal insolvencies rise by 13% in 2016

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The total number of individual insolvencies in England and Wales rose to 90,930, at a time when the Bank of England recently warned of dangerously high levels of household debt.

This is in stark contrast to 2015, when only 18,866 became insolvent, suggesting a significant worsening of the economic climate.

However, the Government's Insolvency Service - who published the figures - note that even with the rise, the 2016 figure was lower than that of any year between 2006 and 2014.

Breaking down the figures

The highest figure during this period was recorded in 2009, when 134,142 people declared bankruptcy, took out either an Individual Voluntary Arrangement (IVA), or claimed for debt relief.

This year, it was IVAs that were largely responsible for the increase in insolvencies, rising by 23% to reach 49,745.

This means that some 50,000 people voluntarily agreed to enter an arrangement whereby they will make regular payments to their creditors over a fixed period (usually five years).

Such agreements enable insolvent people to pay off their debts in a more manageable way, yet they come with their own costs. Because they have to be arranged via an insolvency practitioner, they demand a fee that, according to Citizens Advice, is "in the region of £5,000 on average."

This makes them something of an option of last resort, and also makes debt relief the more preferable route to insolvency.

Unfortunately, such a route isn't open to everyone. To qualify, the following conditions must be met:

• you're unable to pay your debts
• your debts are worth up to £20,000
• you've got £50 or less left over each month after you've paid your usual household expenses
• you don't own your home
• other savings or things of value you own, called assets, are worth less than £1,000 (some assets are ignored when working out the value)
• you don't own a car worth £1000 or more, unless it's one that's been specially adapted because you have a disability
• you haven't had a DRO in the last six years and aren't going through another formal insolvency procedure, such as bankruptcy or an individual voluntary arrangement (IVA)
• you've lived, had a property, or worked in England or Wales in the last three years.

If met, applicants will be issued with a debt relief order (DRO) that usually covers them for a period of a year. During this year, they don't have to make payments towards the debts covered by the order, and once it's over, these debts will be written off.

And like IVAs, DROs also saw an increase in 2016, to 26,196 (a rise of 8.4%). However, the Insolvency Service remark that this was mainly "because of a change to eligibility criteria effective October 2015", with the maximum debt being lifted from £15,000 to the current ceiling of £20,000.

Implications

Yet even with this change to eligibility, the increase in IVAs is somewhat worrying, especially in light of recent warnings on ascending levels of debt.

It shows how these warnings weren't simply abstract musings from the Bank of England and other analysts, but referred to a serious situation that can have considerable repercussions for people.

This is especially so when debt can have dire effects on people's mental health, with the Money and Mental Health Policy Institute reporting that every fourth person in the UK with problem debt also has a mental health issue.

Given this alarming statistic, and given the alarming rise in household debt, it's clear that lenders, charities and the Government need to provide more help to financially vulnerable people in order to prevent the problem from getting any worse.

Such sentiments have been echoed by the StepChange Debt Charity, whose Chief Executive Mike O'Connor said, "It is time to look hard at whether the protections for people in financial difficulty are both adequate and accessible for the future."

However, now that inflation rose to a two-year high of 1.6% in December and the Resolution Foundation predicted an end to a mini-boom in incomes, it's possible that things may only become more difficult in the near future.

This is perhaps why, among other things, the Government should consider rolling back the planned £3.4 billion cuts to universal credit in full, rather than partially compensating for it by simply reducing the "taper rate" at which it's withdrawn from people in work.

Because otherwise, the insolvency rate may rise again in this coming year.