Q2 insolvency figures decline as UK individuals batten down the
hatches against economic storm
Leading business and financial adviser Grant Thornton says the
decline in personal insolvency numbers for Q2 2008 shows UK
individuals are adjusting their spending patterns to weather the
slumping UK economy, but warns that an impending surge in the
number of personal insolvencies is inevitable as inflation and the
credit crunch continue to bite.
In this latest quarter (Q2 2008) the number of UK personal
insolvencies has decreased by 2% on the previous quarter with
24,553 individuals entering into bankruptcy or an IVA* (Individual
Voluntary Arrangement). This represents a drop of 8.3% on the same
quarter last year (26,774).
Additionally, at the half year stage personal insolvencies now
sit at 49,607 for the first two quarters of 2008. Although 11.2%
lower than at the same stage last year (55,890 for Q1 and Q2 2007),
this means that 271 individuals are becoming insolvent per day.
Commenting on the drop in personal insolvency figures over the
last quarter, Mike Gerrard, a personal insolvency partner at Grant
Thornton, says, "These latest figures are something of a surprise.
It seems individuals have succeeded in reining in their spending
and riding out the tough times longer than anticipated, but it's
unlikely to last."
He continues, "Inflation is rocketing upwards while salaries are
increasing by less, and the credit crunch and rising fuel prices
are well and truly being felt in peoples' pockets. If the economy
continues to slow further there will be job losses from an increase
in company insolvencies which combined with further predicted falls
in the housing market will feed through into the personal
insolvency numbers."
Gerrard says it is interesting to note that many analysts have
compared the current economic climate to the slump of the early 90s
when falling house prices, low consumer spending, high interest
rates and the UK being forced to withdraw from the European
Exchange Rate Mechanism came to a head on 'Black Wednesday'**.
With the added pressure of rapidly rising oil prices, Gerrard
expects that the pattern in personal insolvencies felt as a result
of those events in 1992 is likely to be repeated.
"Black Wednesday occurred in September of 1992, but a rise in
personal insolvencies following that event was felt in Q4 of that
year and in a big way in Q1 1993. Likewise, I expect to see a rise
in personal insolvencies later this year, but particularly in Q1
2009 when the cumulative effects of rising costs and debt woes are
given an extra push over the precipice by Christmas spending," says
Gerrard.
Gerrard notes that the difference with the current situation in
personal insolvencies compared to that of the 90s is that there is
unlikely to be a single defining moment like Black Wednesday this
time round.
"An increasing number of individuals will become insolvent as a
result of these tough times, but it will be from a steady build up
of financial pressure which turns controllable debt into
unmanageable debt," he says.
IVA sector slow to embrace protocols from voluntary
code
Today's insolvency figures show a slight decrease in IVAs from
9,562 to 9,256 a 3.2% drop, and an equally slim decrease in
bankruptcies which fell by 1.3%. The number of IVAs also remains
down on the same quarter last year (9,256 compared to 10,561).
Q2 2008 is the first fully representative quarter of approved
IVAs since the implementation of the agreed IVA Protocols on 1
February 2008 and Mark Allen, head of IVAs at Grant Thornton, says
a combination of the economic downturn and the sector embracing the
new voluntary code will see IVA numbers rise further on in the year
and into 2009.
He says, "Initially there was a fall in the number of IVAs being
approved by creditors as IVAs lost some of their lustre from
aggressive providers in the market, but there will be a rise as the
new protocols are embraced by the British Bankers Association and
insolvency practitioners, and as IVAs are seen as a sensible method
for creditors to recover a portion of their lending when
individuals become insolvent."
*IVAs - Introduced to the UK in 1986, IVAs are
agreements between debtors and creditors allowing interest on debt
to be frozen and giving the debtor a better chance of returning
some, or all, owed monies to creditors over a maximum period of
five-years. IVA's provide a highly preferable alternative to the
unregulated debt market since they serve to reduce the amount of
time an individual may be tied to paying off their debt. IVAs are
also the only way to freeze debt which unlike that managed by debt
consolidation plans and debt management plans does not increase
with the interest charged.
**Black Wednesday refers to 16 September 1992
when the Conservative government was forced to withdraw the pound
from currency fix, the European Exchange Rate Mechanism (ERM) after
they were unable to keep the Sterling above its agreed lower limit.
In 1997 the UK Treasury estimated the cost of Black Wednesday at
£3.4 billion.