Surge in Number of People Seeking Debt Relief as COVID Aid Ends
Official figures reveal a significant increase in the number of individuals seeking legal protections from creditors, while corporate insolvencies reach levels not seen in over a decade. The data from the Insolvency Service covering England and Wales during the second quarter of this year shows that 6,342 companies were registered as insolvent in the three months leading up to the end of June, marking a 13% increase compared to the previous year. This figure represents the highest number of insolvencies since the second quarter of 2009.
Furthermore, the number of creditors’ voluntary liquidations (CVLs), which allow directors to voluntarily close down an insolvent business, reached 5,240 during the quarter, the highest figure recorded for a quarter since records began. These statistics reflect growing concerns about the impact of rising living costs and the challenges faced by businesses in the post-COVID economy.
Impact of the End of COVID Aid
The end of COVID-related taxpayer aid, coupled with the Bank of England’s efforts to combat inflation through interest rate hikes since December 2021, has intensified the financial pressure on households and businesses. Borrowing costs have surged, exacerbating the cost of living and the cost of doing business. As a result, the number of individuals seeking “breathing space” from their debts increased by 26% in the three months leading up to the end of June, compared to the same period last year.
A “breathing space” provides individuals with legal protections for up to 60 days to help them manage their problem debt. The total number of applications for this relief reached 21,232, with 313 of those applications coming from individuals with mental health problems who are granted additional protections throughout their treatment.
Corporate Insolvency Figures
Lindsey Cooper, a partner at RSM UK Restructuring Advisory, commented on the corporate insolvency figures, stating, “The significant increase in total insolvencies is not surprising, as 83% of them involve small businesses entering into a liquidation process. The directors of these companies have determined that they have exhausted all recovery options and have no choice but to cease trading.”
Cooper further explained that many of these businesses have high levels of debt and limited reserves. They have managed to survive until now with the help of COVID support measures. However, with the rise in interest rates and inflation, these businesses, which previously benefited from cheap loans and operated on small profit margins, are now facing significant challenges when it comes to renewing bank facilities or refinancing. As a result, it is expected that the number of liquidations will continue to increase in the short term.
Overall, the surge in individuals seeking debt relief and the rise in corporate insolvencies highlight the ongoing economic challenges faced by businesses and individuals in the post-COVID era. As borrowing costs increase and inflation rises, it is crucial for businesses to adapt and find sustainable solutions to navigate these difficult times.