Even though the overall number of people declaring themselves insolvent has fallen between 2010 and 2011, it seems that the reason for this is that many are being forced to seek alternative informal debt management solutions because of the prohibitive cost of bankruptcy.

The latest UK government figures released today show that overall the numbers of people declared formally insolvent fell from 135000 in 2010 to c120000 in 2011, a drop of 11.3%.

These figures certainly paint a positive picture about the general state of personal finances in the UK today. However a closer look reveals that it is only where bankruptcy is concerned that the figures are falling.

The figures show that in 2011 41845 people were declared bankrupt. This compares to 59173 in 2010, a fall of c 30%.

However the number of people who started individual voluntary arrangements (IVA) remained broadly similar in 2011 compared to 2010 with a fall of just 3% year on year and the number of people starting a Debt Relief Order (DRO) actually increased by 15%.

The reason for the fall in insolvencies overall in the last year is therefore largely due to the fall in people declaring themselves bankrupt. The question must therefore be asked: Why is bankruptcy becoming less popular?

The rising cost of bankruptcy

One of the key reasons for the significant drop in the number of people declaring themselves bankrupt is the amount it costs to go bankrupt.

To declare yourself bankrupt you currently have to pay a fee of £700 in cash on the day you go to court.

The cost of declaring yourself bankrupt has risen dramatically in the past few years. In fact in 2011 alone the cost increased by 17% from £600 to £700.

Although people on low incomes may be eligible to have this fee reduced to £525, the fact remains that this cost is preventing many people from being able to take advantage of the bankruptcy debt solution even if they believe it is the right solution for them.

The debt relief order alternative

In 2009, the Government tried to pre-empt problems associated with the rising cost of bankruptcy by introducing a new formal debt solution called the Debt Relief Order (DRO). 

The affect of undertaking a debt relief order is broadly similar to bankruptcy in the sense that all of your debts are taken away from you and after 12 months they are written off leaving you debt free.

Debt relief orders have proven popular with the number of people using this solution increasing by 15% between 2010 - 2011 to c29,000.

However the criteria you must fit within to be eligible for the DRO solution are very strict not least that your debts must be lower than £15,000 and your disposable income lower than £50 a month.

As such, a huge number of people fall outside the DRO criteria but still struggle to go bankrupt because they simply cannot afford to pay the fee.

After all, if you have debts of £16,000 and your disposable income is £70 a month, you are not eligible for DRO but saving £700 to pay for bankruptcy is a neigh on impossible task.

More people turning to debt management plans

Although overall the number of informal insolvencies has reduced, we have seen that the number of IVAs remained broadly static and the number of Debt Relief Orders actually increased.

These figures suggest that in fact there may not actually be a huge shift in the number of people who need to declare themselves bankrupt. However they simply cannot afford to do so.

My suggestion is therefore that instead, these people are being forced to consider the alternative of debt management plans (DMP). Generally there is no significant fee to start a DMP. You simply pay back to your creditors what you can afford each month.

Debt management plans are informal arrangements and so there is no register of their numbers but large providers of debt management services such as the CAB (Citizens Advice) and CCCS (Consumer Credit Counselling Service) have repeatedly confirmed during 2011 that they have never been busier.

The concern however is that if the level of debt that an individual has got is serious but they can only afford to repay a relatively small amount each month, the DMP could last for many years. The individual will never therefore have the opportunity to break out of debt which the bankruptcy would have offered them.

Calls for reduced bankruptcy fees

Recently there have been calls for the government to reduce the cost of declaring bankruptcy.

One idea is that the process of presenting a bankruptcy petition at the court should be scrapped and as with debt relief orders, the application be considered by the official receiver alone.

There seems a lot of sense in this especially given that in many local county courts and the Royal Courts of Justice in London you are actually unlikely to have to see a   judge at all when presenting your bankruptcy petition.

If the bankruptcy fees are reduced to a more manageable level, perhaps people will again begin to use this solution rather than being forced to informal debt management arrangements which may well not be the best option for them.

What to do next

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