Bank profits are being hit by bad debt write offs. At the same time, the number of people going bankrupt is rising sharply.
Debt and bankruptcy has been increasing
BBC News examines why it is so many people are defaulting on their debt.
What is the scale of bad debt?
Lloyds TSB has become the latest UK bank to warn on escalating bad debts.
The bank's latest results revealed that Lloyds' UK retail banking arm set aside £632m against bad debts during the first half of 2006, a rise of 16%.
The number of personal insolvencies - when people are declared bankrupt or enter an Individual Voluntary Arrangement (IVAs) - paints an even gloomier picture.
More than 23,000 people became insolvent in England and Wales during the first three months of 2006 - 73% more than in the same period last year.
New personal insolvency figures are out on 4 August and are expected to show another rise.
Why are more people going bankrupt?
There seem to be many reasons for the rising tide of insolvency.
Firstly, in recent years there has been a massive expansion of UK personal debt.
For a good few years, the UK consumer has enjoyed benign economic conditions.
High levels of employment coupled with low interest rates have boosted consumer confidence.
With such a golden backdrop, banks have been falling over themselves to lend money.
A number of debt advisers suggest that some lenders have behaved irresponsibly by fuelling the UK debt culture.
Logically, the more people there are in debt, the greater the chances of people falling into arrears.
However, some bodies such as the Credit Services Agency, which represents debt collectors, have suggested that recent changes to the bankruptcy law make going insolvent easier and less punishing, which has led to the rise in insolvencies.
Is it easier to go bankrupt?
The Department for Trade and Industry (DTI), which is responsible for the Insolvency Service, is adamant that bankruptcy is "no easy option".
BANKRUPTCY LAW CHANGES
Automatic discharge after one year
Creditors have three years to deal with bankrupt's home
Some bankrupts may continue to pay off debts even after discharge
Dishonest, reckless or blameworthy bankrupts could face restrictions for up to 15 years
However, the government's Enterprise Act fundamentally reformed UK bankruptcy.
Bankrupts can now find themselves discharged after just one year, down from three.
In addition, under the reforms, the homes of bankrupts were given better protection from being seized by creditors.
Some suggest that these measures have tipped the scales and that debtors who face a choice between struggling on or going bankrupt are now more likely to go down the latter route.
Are there any other reasons for rising tide of personal insolvency?
In recent times, a whole industry has sprung up around insolvency.
This has centred on management of IVAs.
IVAs are an alternative to bankruptcy that allows debtors to come to an agreement with their creditors.
Firms offer to set up and manage customers IVAs for a fee, charged to the creditors.
IVA management services have been widely advertised, and this, some experts suggest, has prompted many to take the insolvency path.
Could bad debt get out of hand?
It largely depends on the what happens to the economy.
CONCERNED ABOUT DEBT?
National Debtline: A free, confidential and independent service funded by the Department of Trade and Industry and the credit industry. Tel: 0808 808 4000
Business Debtline: Provides a free telephone debt counselling service for self-employed and small businesses, funded by banks. Tel: 0800 197 6026
Consumer Credit Counselling Service: Funded entirely by the credit industry, the service offers advice to people in debt. Tel: 0800 138 1111
Citizens Advice: Offers free, independent and confidential advice from more than 700 locations throughout the UK. Tel: 0207 833 2181
Of late, there have been signs that consumers are tightening their belts.
On Monday, the Bank of England said that new credit card borrowing was at its lowest for 12 years.
Last week, the Association of Payment Clearing Services said that spending on credit cards was actually lower in the first half of 2006 than during the same period last year.
The main worry for economists is what will happen if interest rates have to go up.
The higher rates go, the more people are likely to opt to become insolvent.
The doomsday scenario is that so many people go insolvent as to cause what is called a credit crunch - where the banks, to protect their own finances, cut back on lending severely, sending the economy into a downward spiral.