What are the figures and what is the outlook?
Numbers released on Friday showed a further drop in personal insolvencies for the first quarter of 2012, following falls in three out of the four quarters in 2011.
This may sound perverse at a time of the year when Christmas spending is hitting the credit card, figures show a return to recession, unemployment and inflation remain high, mortgage rates are increasing and the full force of austerity measures have yet to be felt.
However, since September 2008, widely viewed as the start of the economic downturn with the fall of Lehman brothers etc, unsecured consumer debt has fallen month on month for the past three and half years, save for one month in January this year.
The reality is that the consumer has responded to the recession by curtailing excesses. No more evidence of that is needed than to look at the performance of retailers since 2008.
One trend that should be watched however is the prevalence of short term pay day loans. This is easily available debt, even for those with bad credit ratings, at eye watering interest rates. Whilst personal insolvency numbers are falling, many people still face very financially challenging times.
Those with poor credit reference ratings as a result of spending beyond their means in the last decade have found the traditional routes of unsecured loans and credit card debt unavailable.
It is inevitable therefore, that the popularity of easily accessible money has soared. What remains to be seen is how these loan providers deal with the issue of collection. If debtors are unable to repay these loans, then they may see bankruptcy as the solution.
This could result in the personal insolvency figures increasing as the year progresses and this may go some way to explaining the increase in bankruptcies in the first quarter of 2012.
To reform or not reform?
Last month, a group of Tory MPs tabled reform to the personal insolvency system by proposing a process akin to administration for individuals trading as sole traders or in a partnership. The argument is that where these small and medium size enterprises obtain bank debt and grant security, they should have access to the same processes as companies.
The concern appears to centre around fixed charge receivership and the regulation of those receivers who are appointed to recover lender’s money.
Whilst there are undoubtedly individuals out there acting without regulation, as there are in any industry, reputable lenders have panels of reputable receivers and the level of self regulation in this area remains high.
A further issue to bear in mind is that, if lenders’ ability to recover their money, when they are entitled to it, through receivership or otherwise, is reduced, then lending is only likely to be further limited, at at time when there are regular complaints about the lenders not lending enough.
Reform is due in this area, but any insolvency professional will tell you that that reform should be to assist trustees in bankruptcy to recover money for creditors, rather than to make a debtor friendly system even friendlier.
Neil Smyth is partner in the restructuring and corporate recovery team at Taylor Wessing