Figures just released by the Insolvency Service show that the swing away from Bankruptcies to other insolvency solutions continued in the fourth quarter of 2010 (Q4 2010). Not since the first quarter of 2005 have the figures for bankruptcies in England and Wales been so low.
For the first time ever, the number of Individual Voluntary Arrangements (IVAs) in England and Wales exceeded the number of bankruptcies in Q4 2010: 12,508 IVAs compared to 12,049 Bankruptcies.
Over the year as a whole the same trend is observable. Total Bankruptcies in 2010 were 59,194 compared to 74,670 in 2009 – a fall of 15,486 or 26% year on year. In the same period the number of IVAs increased from 47,641 in 2009 to a record 50,716. This was an annual increase of 7%.
Debt Relief Orders (DROs) were also up over 15% in Q4 2010 compared to a year earlier and the total of DROs in 2010 was 25,179, the first full year since DROs were introduced in Q2 2009.
In Scotland the number of Sequestrations fell by 26% in Q4 2010. Protected Trust Deeds surprisingly also fell by 10% in the quarter. When 2010 is compared to 2009 the annual fall in Sequestrations was 18% and in Protected Trust Deeds 8%.
In Northern Ireland Bankruptcies decreased by 8% in Q4 2010 compared to QR4 2009 although year on year Bankruptcies did increase by 7% from 2009 to 2010. IVAs in Northern Ireland went up by 20% in the quarter and a whopping 39% annually when 2010 is compared to 2009.
These trends suggest that debtors are showing a marked preference for the IVA vis-à-vis Bankruptcy as a solution to personal insolvency. However, this is not the only underlying cause of the trend. Creditors also seem to have softened their attitudes towards IVAs and have pulled back somewhat from the hardened approach they adopted in 2007 and 2008. Creditors acknowledge that their returns from IVAs in terms of the amount of debt repaid are substantially better than what they can expect to recover from debtors who are forced into Bankruptcy or voluntarily choose that route. In particular creditors seem to have begun to accept that debtors in IVAs should not be prevented from having a reasonable standard of living over the term of their IVAs and that they should not seek to trim back the debtor’s Income & Expenditure projections to the point where any unexpected increase in expenditure or reduction in income causes the IVA to fail. It appears also that that the expenditure allowances in Bankruptcy have hardened somewhat resulting in higher income payments orders or income payments agreements.
Falling property prices and the loss of equity is probably also a significant factor influencing the trend since in many cases it would not benefit creditors if the debtor were forced into selling his or her home in Bankruptcy. In an IVA on the other hand there is at least some prospect that property prices will begin to increase again over the next five years with the expectation that some equity will be present and realisable to be contributed into the IVA for the benefit of creditors. It also seems that the stigma of Bankruptcy is still a significant factor for many debtors. A further factor, which is not always acknowledged by creditors, is the genuine desire which many debtors have to repay as much of their debts as they can in an honourable way and they see an IVA as the best route to do this while offering them some prospect of retaining their home and their dignity.