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The ticking insolvency time bomb

The ticking insolvency time bomb
Credit: Unsplash

As UK PLC braces itself for a financially turbulent time, it is an opportune moment to consider what the past two years have meant for Joe Public and to contemplate what the future holds for those carrying unmanageable levels of personal debt.

The UK is perceived to have one of the more debtor-friendly insolvency regimes.

During the early to mid-2010s, we experienced a significant increase in bankruptcy tourism, with the UK becoming the destination of choice for many Europeans looking to declare themselves bankrupt.

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This was because the personal insolvency regimes in certain European countries were considered harsh compared to our own, which provided a much quicker discharge. 

Over time, however, those countries have adopted simpler models to our own, with Germany, for example, reducing the duration of bankruptcy to three years from up to six years and Ireland to one year from three years (having previously been as long as 12 years). 

The current personal insolvency numbers are, however, at their lowest levels since 2017, with both the numbers of bankruptcies and debt relief orders (DROs) declining since then, particularly since the onset of the pandemic. Bankruptcy numbers are at 50 per cent of pre-pandemic levels.

This is not, however, because there has been a decline in personal debt but is rather a reflection of the government measures introduced in response to the Covid-19 pandemic and the general forbearance extended by lenders in relation to enforcement, particularly HM Revenue & Customs, which traditionally is the biggest petitioner for bankruptcy. 

A pent-up problem

What we have, therefore, is a pent-up problem, an accumulation of those who were already insolvent during the pandemic combined with those that are now insolvent because of it.

The National Audit Office estimated in September 2021 that over the course of the pandemic, 2.4mn more UK taxpayers had fallen into debt with the HMRC. 

Following the chancellor’s recent spring statement, the Office for Budget Responsibility predicted that UK inflation could reach 8.7 per cent in Q4 2022, with real household disposable incomes per person reducing by 2.2 per cent in the next financial year – the biggest such reduction in more than 65 years, generated largely by supply bottlenecks, the impacts of soaring energy prices and the escalating seriousness of the situation in Ukraine.

Added to this, a gradual uptick in interest rates is loading additional cost onto consumers’ mortgage and credit payments. 

While the Bank of England’s forecast is that the increase in inflation can be expected to be only a temporary spike, the reality is that it comes at a time when many consumers are already struggling to cope, and it may, therefore, prove to be the final straw for a great many people. 

To exacerbate this, the restrictions on debt enforcement during the pandemic are now removed, leaving creditors able to petition for corporate winding-ups and potentially the bankruptcies of individual directors, with the Covid-19 protections having given many such individuals a false sense of security since March 2020.

In addition, the widespread incidence of fraud identified in the claiming of the coronavirus support measures across many businesses may lead to numerous directors being held liable for fraud or misfeasance claims, thus increasing the potential personal insolvency numbers.