Bottom falls out of bankruptcy market

Insolvency practitioners have seen their profits slashed from handling personal bankruptcies even as the number of people becoming insolvent has climbed.

The dramatic fall in income has seen at least one bankruptcy unit in a Big Four firm closed, with the redeployment of staff, while experts claim that there may be little incentive for insolvency practitioners to continue dealing with personal bankruptcies.

KPMG has closed down its bankruptcy division in Gatwick and redeployed staff to its Bristol, Stoke and Southampton offices.

Richard Hill, head of bankruptcy at the firm, said: ‘KPMG has suffered a downturn in the volume of work [bankruptcy], and I took the decision in January to reallocate those cases.’

The reversal has been caused by the collapse in the housing market, leaving most bankrupts without a high value asset to pay creditors and bankruptcy trustees.

Joanne Wright, personal insolvency partner at Begbies Traynor, said the firm would once have taken on cases with around £10,000 in equity in a property, but that benchmark has risen substantially to around £40,000.

The Insolvency Service announced in their Q1 figures this year that personal bankruptcies had increased by 23.4%, compared to the same period in 2008, to a total of 19,062.

One senior insolvency practitioner told Accountancy Age his firm has made no money from its bankruptcy division this year. He said bankruptcy specialists taking on cases were entering a ‘lottery’ over how much money they would recover.

Pat Boyden, personal insolvency partner at PricewaterhouseCoopers, said: ‘The average dividend has fallen for individual voluntary arrangements and bankruptcies.’

He predicts nine out of ten bankruptcies ‘won’t even gain 1p in the £1 for creditors’.

Even though it would involve working at a loss, five firms scrambled to win a major credit card contract for being trustee in bankruptcies or IVAs. The tough competition came because the contract will leave the winner well-placed for an upturn in the economy.

Smith and Williamson insolvency partner Neil Hickling said, although there is more work, there is less money to be made. ‘Our division was taking 20 bankruptcy cases a month and now we are taking about two’ he added. ‘We are turning away jobs that will make us break even or work at a loss’ he continued.

To combat the falling revenues in the service lines, Smith & Williamson redeployed members of the bankruptcy team to corporate work.

Joanne Wright said IPs are now having to take time out to think about the assets before deciding whether or not to take on a case. ‘IPs now have to take a considered choice in terms of the cases,’ she said.