Increase expected in number of people going 'bankruptcy light'

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The number of people going into a type of personal insolvency known as "bankruptcy light" is expected to have increased during the first three months of 2016 in official figures released on Friday.

The Insolvency Service will publish figures showing the number of people going insolvent between January and March.

There are three types of personal insolvency in England and Wales - bankruptcies; individual voluntary arrangements (IVAs), where money is shared out between creditors; and debt relief orders (DROs), which are often dubbed "bankruptcy light" because they are aimed at people with lower amounts of debt who have no realistic prospect of paying it off.

Previously, only people with debts below £15,000 could apply for a DRO, but in October last year the limit was increased to £20,000, enabling more people to use DROs as an alternative to the "last resort" option of going bankrupt. 

Mark Sands, a personal insolvency partner at RSM, expects Friday's figures to show around 6,725 DROs took place in the first quarter of 2016, up from 6,501 in the last three months of 2015.

He predicts the figures will also show around 9,500 IVAs and 3,900 bankruptcies, making a total of around 20,125 personal insolvencies expected across England and Wales. 

Mr Sands said: "While the number of personal insolvencies overall has remained broadly flat, the rise in the popularity of debt relief orders can be largely explained by changes to eligibility criteria."

Mr Sands also said that while the number of people going bankrupt has been on a general downward path in recent years, the bankruptcy figures could start to see a rise.

He said: "There are two reasons for this. One is that HMRC (HM Revenue and Customs) is winning many cases against those who have entered into tax avoidance schemes.

"Secondly, and more importantly, new changes introduced in April of this year have reduced the costs of entering bankruptcy, introduced flexible payment methods and dispensed with the requirement for debtors to attend court - thus removing much of the stigma associated with bankruptcy.

"We expect that these changes will encourage many more people to seek relief from problem debts using the bankruptcy route in the future."

Maureen Leslie, president of the Insolvency Practitioners Association (IPA), expects to see around 20,000 personal insolvencies in the first quarter of 2016.

She also predicts changes to the DRO criteria will mean their numbers are likely to have increased.

Ms Leslie said: "Overall, personal insolvencies have remained flat when compared to recent quarters, which I attribute to the relatively stable economy and interest rates remaining at record low levels.

"Creditor forbearance is still a feature of the personal insolvency landscape so it's probable that there will be no significant changes in the near future, with 2016 likely to see a total of just 80,000 personal insolvencies, which would be the same as 2015." 

Rock bottom interest rates have kept the cost of people's debts relatively cheap - but some recent lending reports have prompted concerns that consumers may be being tempted to over-stretch themselves financially. This could potentially cause problems in the future when interest rates eventually start to go up. 

Mr Sands said: "This recent surge in unsecured lending does raise questions over whether consumers are over-borrowing. Only time will tell, but people considering a loan would do well to take sensible precautions to make sure they don't get caught out.

"It's always advisable for borrowers to work out their monthly budget and consider how they would cope with a change in circumstance, such as ill health, a reduction in income or a rise in interest rates by up to two percentage points. Carrying out these types of personal 'stress tests' can really help people determine how much they can comfortably afford to borrow."