Why are bankruptcies falling?

Official figures today confirmed the continuing fall in the number of bankruptcies as families cut back on their borrowing and those who do hit the buffers opt for cheaper ways of getting protection from creditors.

Total personal insolvencies fell by 11 per cent in 2011 to just under 120,000 in England and Wales, according to the Insolvency Service.

Within than total, the number of bankruptcies dropped sharply, by 29 per cent, to 41,845.

It's not unexpected for financial failures to drop back after a recession, following an initial surge, as households avoid new borrowing and banks and credit card companies restrict their lending.

There's also a tendency to put off applying for help until after Christmas and New Year celebrations, so some debt experts predict a rise in insolvencies in the first few months of 2012.

However, most dramatic has been the recent jump in Debt Relief Orders, a cheaper alternative to bankruptcy which doesn't involve going to court.

While bankruptcies declined last year, Debt Relief Orders rose 15% to 29,949.

DROs are designed for debtors with hardly any assets and debts of less than £15,000.

At the same time, many people in difficulty, along with small traders, have been opting been opting for Individual Voluntary Arrangements, under which payments to creditors can be reduced - rather than choosing bankruptcy.

Despite the overall fall last year, total insolvencies continue to run at more than twice the levels seen before the credit crunch and the lending boom which preceded it.

£700 to go bankrupt

A rise in the cost of going bankrupt could discourage people with financial problems from seeking a solution, debt experts are warning.

The fee for petitioning for bankruptcy has gone up by £75 to £525. With the court fee added on, the total upfront cost is £700.

The deputy head of the Insolvency Service, Graham Horne, says the increase is needed to "cover the overall cost of administering the service".

The charges, including court fees, have gone up by 37% since March last year.

A leading insolvency practitioner, Mark Sands from RSM Tenon, warns that the hike would put extra pressure on individuals who are likely to be under stress or depressed.

"So many people flounder around and don't see a way out," he says, "They are going to be put off exploring bankruptcy as a solution."

The £525 charge is a deposit to cover the cost of managing a bankruptcy, which allows the bankrupt to throw off the burden of debt and make a fresh start.

The Insolvency Service recovers a full administration fee of £1,715, less the deposit, from the bankrupt's assets or surplus income at a later stage. This sum is not being increased.

"The fee is staying the same," argues Graham Horne, "But we are increasing the proportion of that fee which we get on day one."

The Insolvency Service has seen its income squeezed because of the falling value of homes and other assets which are recovered from bankrupts.

Currently, the £1,715 fee is never fully paid in half of bankruptcies.

"It's unfair to families who are struggling," said a recent bankrupt who spoke to BBC News, although he added, "I felt that any money I had was going to be taken anyway."

"This increase in the cost of going bankrupt is likely to swell the numbers of people falling through the net of the current insolvency regime," comments Jon Elwes from the Money Advice Trust.

"Our advisers at National Debtline speak to people everyday for whom bankruptcy would be the best solution to their debt problem, but for the fact they can't afford the associated fees."

There is now a cheaper and easier alternative, the Debt Relief Order or DRO, which costs only £90.

An increasing number of people in financial trouble and looking to escape their debts have been avoiding bankruptcy and taking this lower cost route.

In the first quarter of this year there were 6,788 Debt Relief Orders, a 20% rise on the previous year.

But you can only ask for a DRO if your debts are under £15,000 and your savings and assets are less than £300.

"What if you have £16,000 of debt?", asks Mark Sands of RSM Tenon. "You're faced with that barrier of hundreds of pounds before you can opt for bankruptcy to resolve your difficulties."

"It's a very steep rise," adds Una Farrell from the Consumer Credit Counselling Service.

"We already have to do a lot of work helping our clients to get the money together to pay the fees."

But Graham Horne says the Insolvency Service is obliged by parliament to break even, a task which has become increasingly difficult.

"It has always been our policy that if bankrupts can pay something towards their debts then they should," explains.

"And we have to strike a balance between giving bankrupts debt relief and a fresh start, and the need to provide some return to creditors."

Emergency assistance company collapses

Homecall Plus in compulsory liquidation

Thousands of people across the UK could be affected by the collapse of a Blackburn-based firm which provides cover for plumbing, heating and other emergencies in the home.

Homecall Plus of Furthergate, Blackburn, has been put into compulsory liquidation by the official receiver in Blackpool.

10,000 customers who bought policies up to 3rd December last year should still receive cover. The policies were underwritten by Brit Insurance, which is honouring them.

However, it is thought that some customers who signed on after 3rd December, 2010, could be left without cover, under policies which cost around £11 a month or £126 a year.

The Financial Services Compensation Service has yet to decide whether such customers would be eligible for compensation.

The case has been transferred by the Insolvency Service to its Public Interest Unit which customers can contact on 0161 234 8531.

Debt Relief Order - what's that?

6,788 people found out in the first three months of this year.

That's up from 6,172 in the quarter before and sharply higher than 5,644 a year ago.

Debt Relief Orders, or DROs, are on the rise and the numbers are likely to climb further.

The Orders are a sort of bankruptcy-lite, simpler and designed for people with burdensome debts but limited assets.

I explained in a previous note why the arrival of DROs is significant, but one obvious advantage is that they are a cheap way to make a new start.

A DRO costs £90, while going bankrupt is £625, rising soon to £700.

Bankrupts end up paying even more than that out of their assets, if there's enough after everything is sold off.

So, while DROs are on the rise, bankruptcies are going down, the Insolvency Service tells us, though many predict an overall rise in individual insolvencies later this year.

If you want to find out more about Debt Relief Orders, here's a good place to start.