South: Personal insolvencies to soar in 09

2009 is likely to see personal insolvencies reach record levels, with more than 150,000 people entering into an Individual Voluntary Arrangement (‘IVA’), being declared bankrupt or entering into a Debt Relief Order which will be introduced in April, according to data analysed by professional services firm KPMG.

In 2008, the KPMG research found that creditors had to write off at least £1.1 billion (2007: £1.3b) in bad debts as a result of the number of people who had entered into IVAs over the past year. The research also shows the average IVA debtor owed £47,800 (2007: £50,300) and proposed to repay only 38% of this sum (equivalent to £18,200 per debtor) (2007: 38% and £19,100).

Mark Sands, Director of Personal Insolvency at KPMG, commented: “Most IVAs deal with personal loans, credit card balances and other forms of unsecured debts. Most of this money was borrowed to meet ‘current’ expenditure including lifestyle items such as holidays, or to meet monthly shortfalls in the household budget, rather than to acquire assets or to fund a business.

“By the time people realise the extent of their problems, their total debts will have been swelled by interest, charges and even further borrowing to fund the minimum repayments. In 2008, the average IVA debtor owed £47,800, however, this hides a wide spread of debt levels ranging from around £20,000 to more than £100,000 – KPMG estimates that more than 2,500 people entered into IVAs with debts exceeding £100,000 this year.

“This high average level of debt clearly indicates that too many people have borrowings that they have no realistic hope of repaying,” commented Sands. “Any excessive spending over Christmas and at the New Year sales, especially where goods are paid for on credit, risks tipping even more consumers over the edge. Those carrying high levels of debt will be ill-equipped to tackle the effects of the downturn such as a reduction in income or a period of unemployment. Many faced with these difficulties will find that their options may be limited – formal insolvency will, for many, be the only way out.”

Sands continued: “We estimate that around 37,000 people used the IVA procedure to write off a portion of their debts in 2008. We estimate that around 67,000 people were declared bankrupt in 2008, taking total personal insolvencies to around 104,000, similar to levels which we have seen for the past two years.

In April 2009 the government plans to introduce Debt Relief Orders (DROs), which will allow consumers with debts of less than £15,000, and minimal assets or surplus income, to write off their debts without entering into a full blown bankruptcy. Welcoming this move, Sands said: “We expect this new approach to increase the number of people using personal insolvency as the way to deal with their debts. DROs, together with the expected increase in unemployment, are likely to lead to record levels of personal insolvency of more than 150,000, in KPMG’s view.

Sands added: “IVAs allow a consumer or small business person experiencing payment difficulties to propose a way forward to their creditors. Our research shows that 16% (one in six) of people had their IVA turned down by creditors. It remains essential that all involved continue to hold an open dialogue about the wide variety of solutions which are available to the increasing number of consumers struggling to manage their debts. Lenders as well as debtors will want to ensure that the best solution is found for all concerned.”