Exploring the Reasons for UK's Decreased Insolvency Rate

The Predictable Result of the Credit Crunch: Increased Demand for Financial Debt Management

In the United Kingdom there have always been charity organizations and commercial financial debt management companies that the people could turn to when paying their debts becomes a very difficult and almost impossible thing to accomplish.

Even before 2011 there had been signs already that the year will be a rather difficult one for the British people. The UK left 2010 with very high levels of insolvencies and bankruptcies, and inflation had just started gearing up. Even then the free debt solution organizations were already warning consumers about the dangers of falling into debt in 2011.

Indeed, this warning became true. This year there has been a rise in the number of people who are approaching Citizens' Advice, CCCS, Payplan, and other organizations for free debt solution advice. Many have also chosen to pay for the services of commercial debt management companies which can help them renegotiate and ultimately repay back their debts.

One popular form of financial debt management, which is practically only one step before bankruptcy, is IVA. Although people who apply for this will have to be declared insolvent, many of them saw this as a better alternative to complete bankruptcy.

Thus, the year 2010 recorded plenty of high figures for insolvencies.

The Unexpected Result of the Credit Crunch: Reduced Insolvencies despite High Rates of Financial Debt Management Applicants

The unexpected outcome in this situation though is that the insolvency rate in UK had in fact dropped down by two figures in percentage scale, based on the date released by the Insolvency Service in UK.

During the first Quarter of 2011 there were approximately 30,162 insolvencies in Wales and England, which turns out to be 15.5% less than the count last year. This only very slightly raised by the second quarter. By then there were already 30,512 individual insolvencies-but even that is a 12.2% reduction from the same period last year. Obviously the predictions and expectations that the insolvencies in 2011 will be even higher were wrong.

This may seem puzzling at first since there is no denying the economic difficulty that the household level is already experiencing. Ideally, there should be higher numbers of insolvencies since the unemployment rate remains high, inflation makes certain that the people are forced to spend more than they were used to, and debt management services now became highly in demand.

Everything makes perfect sense if you analyze the numbers more closely though. The breakdown for the first Quarter insolvencies was as follows: 12,539 bankruptcies, 10,835 from IVAs and 6,788 from DROs.

For the second Quarter, it's 11,113 bankruptcies, 12,143 IVAs and 1,257 DROs.

The data confirms the reports that more people are now preferring IVA and debt management instead of declaring bankruptcy. It also makes sense for the total number of insolvencies to go down because fewer banks have been lending less (and therefore less opportunities to be in debt and need financial debt management) to consumers because of the credit crunch.