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Being aware of your options as personal insolvency rates rise again
New figures from the Insolvency Service released at the end of April show that the number of individuals applying for insolvency in the first quarter of 2017 has jumped to the highest levels in three years.
Personal insolvencies in England and Wales are up 6.7% on the previous quarter, totalling 24,531 between January and March 2017; this is also a 15.7% growth on the same quarter in 2016. This significant growth in personal insolvencies comes just weeks after news of inflation rising to 2.3% putting pressure on household incomes which are already squeezed due to low pay growth.
Some informal solutions – such as debt management plans – are not formally recorded so personal insolvency statistics takes no account of these. Another factor which can distort the “big picture” of personal debt levels is the use by some individuals of borrowing either to consolidate debt or as a short term “fix”.
Over the coming months, the inflation rate is expected to rise further to 3%, it is anticipated that the pound will fall as Brexit gets closer and there is more uncertainty due to the general election. All of this points to tough times ahead for the finances of many households across Britain which is a cause for concern for many.
Chief executive of the Money Advice Trust, Joanna Elson, is one of those that is concerned about these new personal insolvency figures; “Growing levels of household debt and extra pressure on budgets from inflation are a worry, and we expect this to translate into greater demand for free debt advice over the rest of 2017,”
However Adrian Hyde, president of insolvency and restructuring body R3, points out that the figures are still relatively low and feels they should be taken as a warning of a potential future; “Compared with where insolvency numbers were a few years ago, personal insolvency rates are still low and the recent bankruptcy rises have been very small. However, a continued gradual upwards shift may be a sign that the post-recession return of high levels of consumer borrowing and spending is starting to reach its limits.”
So when it comes to dealing with debt problems which formal personal insolvency solutions are people turning to?
59% of personal insolvency cases in the first quarter were dealt with through the use of an individual voluntary arrangement (IVA). An IVA is a formal agreement between you and your creditors to pay back the money you owe in a series of regular monthly payments which you can afford. An IVA usually lasts for five years and will show on your credit file for six years.
An IVA can only contain unsecured debts such as credit cards, loans and overdrafts; secured debts such as mortgages or hire purchase and other debts including parking fines and student loans cannot be included in the arrangement. You should have two or more creditors to be eligible for an IVA as you will need 75%by value to agree; if they agree you will enter the agreement for five years and in most circumstances, when you reach the end of the term any outstanding debts will be written off.
Debt relief orders (DRO) made up 25% of the personal insolvency options used in the first quarter of 2017. A DRO is a formal solution to debts under £20,000 and is a low cost alternative to bankruptcy.
This arrangement will provide you with protection from creditors and will see your debt repayments and interest frozen for 12 months, if your financial situation hasn’t improved during the 12 months, your debts will be written off.
Like an IVA, a DRO will appear on your credit file and you will not be eligible for this option if you are a homeowner. However, it is a great solution for those who owe low levels of debt, earn a small amount and have little to no assets.
Finally, bankruptcies made up 16% of the rest of the cases of personal insolvencies in the first quarter of 2017. This can be a good idea if you don’t own any assets, owe over £5000 and want to clear your debts to start over with a clean slate. A bankruptcy currently costs £680 to apply for yourself or a creditor can apply to make you bankrupt.
In a bankruptcy, the money you owe will be written off however generally you will be in the bankruptcy for at least a year and it will remain on your credit file for six years. This can make it difficult for you to obtain credit in the future. It is also worth being aware that your bankruptcy can be extended should you have held back information on your initial application or if there has been any fraud or illegal activity involved.
There are many options available for those that are struggling with debt and even though personal insolvency figures are rising, it is still positive that people are getting the help they need and are choosing the correct solution for them and their circumstances.
Advice from debt charities and ourselves is to seek advice as early as possible to deal with the debts you are currently struggling with. If you are having difficulty managing your debts, get in touch with on 0800 901 2488 and our friendly professional advisers will be able to help you find the right solution for your situation.