DROs: Is a second wave of serious debtors forming offshore?

Jonathan Samuels - 02 February 2012

The insolvency figures from the fourth quarter of last year came out this morning and it was encouraging to see that personal bankruptcies dropped by 28%.

However, while a drop like this is welcome, it is more a reflection of the fact that the first wave of serious debtors has now gone through the system - rather than the underlying financial health of UK households.

The $64,000 question is whether a second wave of serious debtors is forming offshore. The fact that Debt Relief Orders - a type of 'bankruptcy lite' for people with debts of up to £15,000 - were up 18% certainly confirms that a growing number of people are struggling with debts and are having to enter into an agreement with their creditors.

Over time, a percentage of these people will invariably succumb and fall into more serious insolvency procedures, namely bankruptcy. They're hardly being helped by high inflation, rising unemployment and an economy pretty much running on empty.

Debt levels, of course, have a direct impact on the property market. The more debts people have, the less likely they are willing - or able - to purchase property. Debts disincentivise prospective borrowers and they do prospective borrowers no favours with lenders, as would-be applicants fail to meet their affordability criteria.

There's no doubt, of course, that the number of DROs and other insolvencies would be far greater if interest rates were higher. Thousands of UK households, as we all know, are being sustained by ultra-low borrowing rates.

But when interest rates do start to rise, the pressure on their finances will prove unbearable and many will be forced into formal procedures, often involving - tragically - the forced sale of their homes. The property market will naturally suffer as a result.