Spike in personal insolvencies could happen in run-up to Christmas, survey finds

The number of people going financially insolvent is poised to spike in the run-up to Christmas as businesses fail and unpaid debts mount up, a survey of experts suggests.

The majority of personal insolvency experts who think there will be an increase in cases in the coming year think the spike will happen towards the end of 2020, although a significant proportion predict it will be in early 2021, according to the findings from insolvency and restructuring trade body R3.

More than two-fifths (41.6%) of those who work in personal insolvency predict the number of people going financially insolvent in the next 12 months will be significantly higher than last year, the survey found.

A further 44.5% in R3’s member survey think personal insolvency cases will be somewhat higher than 2019.

Of those who expect the numbers to increase, the majority (61.5%) expect the this to happen around October to December this year.

Three in 10 (30.6%) think the increase will take place between January and March 2021.

Personal insolvencies include bankruptcies as well as debt relief orders (DROs) for people who owe lower amounts that they cannot repay, and individual voluntary arrangements (IVAs). These are agreements whereby money is shared out between creditors.

Low interest rates have helped to reduce people’s borrowing costs in recent years.

But with the furlough scheme being gradually wound down and concerns about job security, households are expected to face further income shocks over the coming months.

Mark Sands, chair of R3’s personal insolvency committee, said: “The Government has introduced unprecedented levels of support for businesses and consumers since the start of the pandemic, and a number of financial services providers have also taken steps to help financially challenged consumers, for example through offering increased forbearance and payment holidays.

“This has meant that the number of people considering a personal insolvency process or asking for advice around one has not risen as sharply as we may have expected during circumstances like these.

“However, these support measures are temporary, and do not cover everybody. When they come to an end, a number of people are likely to find themselves in financial difficulty if their circumstances haven’t returned to what they were before the pandemic.

“With concern around future unemployment levels rising, and borrowing conditions returning to more usual patterns, it is vital for anyone in financial distress to seek out high-quality advice from a qualified provider.”

When asked to predict which debts or payments would be the most common immediate triggers for people seeking advice or insolvency solutions relating to their personal finances over the next 12 months, almost three-quarters (74.2%) of those surveyed cited personal debts related to business failures.

Half (50%) said credit card debt was likely to be a trigger, and 35% cited non-mortgage bank loans or overdrafts.

Mr Sands continued: “It’s not uncommon for a business insolvency to lead to an individual becoming insolvent, especially if the person in question has agreed to take on liability for a business’s debts via a personal guarantee as part of an attempt to turn it around.

“With businesses of all sizes facing difficulty as a result of the Covid pandemic, it isn’t surprising that members expect this to be a common trigger for personal insolvencies in future.

“Credit cards, loans and overdrafts are also frequent personal insolvency triggers – and are areas where banks, building societies and credit card providers have offered temporary support to consumers in the form of options like mortgage and debt repayment holidays, and interest-free overdrafts.

“These will have allowed people who have been affected by the pandemic some time to adjust, but they are only temporary, and their ending will mean people who haven’t returned to a pre-crisis financial position will struggle, which is why we expect more people to need help and support managing their finances.”

R3 surveyed more than 130 personal insolvency specialists.