Debt.org.uk says the pandemic ‘debt bomb’ clock is ticking down to Christmas

Government support measures introduced during lockdown seem to have kept most afloat but insolvency practitioners predict a bleak Christmas

LONDON, UK; 30 September 2020 – When The Insolvency Service released its figures for Q2 of 2020 recently, it was mostly good news. Company insolvencies in England and Wales were down by 23% on the previous quarter and down 33% compared with the same period in 2019. In Scotland, the drop was even greater, down 49% on the same quarter in 2019. Individual insolvencies, whilst up 7% in England and Wales on the same period in 2019, were running at a near identical 12 month rate. Personal insolvencies in Scotland were down 41% on the same quarter in 2019.

This data suggests that the extraordinary measures introduced to support businesses and individuals during the first wave of the pandemic had the desired effect of keeping most people and companies afloat during lockdown. But as those support measures are withdrawn or scaled back over autumn, they and other factors are likely to combine to create a ‘state of chaos’ that could see both corporate and personal insolvencies rise dramatically.

86% of insolvency practitioners said they expected personal insolvencies to rise in the next 12 months.

In the UK, only licensed insolvency practitioners can conduct formal insolvency procedures such as administration, receivership and CVAs (for businesses) and IVAs and Scottish Trust Deeds (for individuals).

So that fact that 86% of insolvency practitioners said they expected personal insolvencies to rise in the next 12 months should be cause for concern. Expectations for corporate insolvency were even worse, with 93.7% anticipating a rise in numbers, and more than half expecting the rise to be significant. The figures come from a survey of insolvency practitioners by representative body R3.

56% of corporate insolvency experts expected the rise to occur this year. For personal insolvency, 61.5% of practitioners expected the rise to arrive during the run up to Christmas. The remainder anticipate numbers to balloon pre-Easter 2021.

Evidence suggests that the change is already occurring, with 11.7% reporting a significant increase in business.

Debt.org.uk says the UK a ticking debt bomb.

“Insolvencies are triggered when a business or individual can’t pay what they owe,” explained David Baddeley, insolvency expert from debt specialist Debt.org.uk. “What’s unusual about the next few months is the sheer number of different pressures companies and individuals are likely to face. In a ‘regular’ year, any one of them could be enough to tip the balance towards insolvency. But this year, with so many challenges being faced by so many, the pressure could prove overwhelming. It really does feels as though we’re facing a ticking debt bomb at present.”

Those pressures are wide ranging:

Companies are already facing increased staffing costs as the Coronavirus Job Retention Scheme has gradually wound down. By the end of October, unless the government makes a major u-turn, the scheme will end entirely and many businesses are expected to announce redundancies as a result.

Quarterly rents are due at the end of September, placing further cashflow stress on struggling businesses.

Wrongful trading legislation, suspended during the peak of the pandemic to protect business owners at an uncertain time, will be reintroduced in October, leaving company directors open to being held personally liable for their business’ insolvency.

Local lockdowns and the risk of a broader second wave leave businesses in an ongoing climate of uncertainty.

The Brexit transition period ends on 31 December with, as yet, no clear indication of the state of European trade next year.

“The situation is, I fear, as bleak as I have known it,” says David Baddeley, who is clear on what needs to happen next: “We’re fast approaching what could be a state of chaos by Christmas. Ideally, we need to see government action – such as an extension of or alternatives to the furlough scheme in key areas or a solid post-Brexit deal – to limit some of the fallout.

“But because no business – or person – can rely on that hope alone, company owners and individuals need to look at what action they can take now to address the problems that lay ahead. That may mean announcing redundancies. But it may equally mean diversification, retraining, seeking investment or exploring new opportunities with the help of a mentor or business advisor. Where debts are already mounting, it’s vital that those debts are reduced, restructured or otherwise addressed now. What people mustn’t do is put their heads in the sand and hope it all goes away because, if they do, we’ll be seeing many more corporate insolvencies, IVAs and protected trust deeds by the end of the year.”

About Debt.org.uk
Debt.org.uk is a financial advice company specialising in debt support for people across the UK who are struggling to repay what they owe. In 2019 alone, the organisation helped 85,889 people agree a plan to sort out their debts.