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Last Updated: Friday, 3 November 2006, 00:02 GMT
Q&A: Rising insolvencies
The government's own Insolvency Service says there has been a sharp rise in the number of individuals being declared insolvent.

Why are more and more people going bust?

The figures reflect the huge build-up of personal debt in the last few years. According to the Bank of England, excluding mortgages this now amounts to 212bn. That was a 100% rise in just under eight years.

How has that happened?

In essence, millions of people have been borrowing billions of pounds more on things like credit cards, overdrafts, bank loans and hire purchase agreements. The nation has been going through a splurge of borrowing.

For an increasing number of people, though, the debts have turned out to be too big. The financial chickens have been coming home to roost.

How long has this been going on?

Until 2003, the figures were steady, with fewer than 9,000 people each quarter going bust, mainly as a result of being declared bankrupt. That year the figures started to pick up, and then in 2004 they really accelerated.

Why did they speed up?

The law on bankruptcy changed with the 2002 Enterprise Act. This made it easier for people to escape bankruptcy.

Until April 2004, bankrupts typically had to wait three years before they could be discharged. Since then, the standard period of bankruptcy has been just one year. This also seems to have stimulated interest in a rival insolvency procedure called the Individual Voluntary Arrangement.

I have seen these advertised on TV. What are they all about?

Known as IVAs, these are a formal deal between you and your creditors, overseen by a licensed insolvency specialist. They have been available since 1986.

In return for promising to pay off a part of your debt in regular instalments, the creditors agree to write off the rest. Organising IVAs for people in financial trouble is a fast-growing business, hence all the TV and newspaper adverts. But it has really upset the banks.

What are the banks worried about?

It seems that some people have been using IVAs to escape some of their bank debts, leading to the high street banks writing off more than 3bn in bad debts in the first half of this year alone.

They have been lobbying the government to tighten up the regulation of the IVA industry. But so far the government has refused, telling them it is their own fault for lending too recklessly in the first place.

What is wrong with the IVA companies? The procedure is perfectly legal, isn't it?

Yes, it is. But the critics suggest that it may be being mis-sold to some people who do not, in fact, need to declare themselves insolvent and who might be able to pay off some of their debts without it. Some banks think IVAs are being touted as an easy escape route, for which the IVA companies earn money.

I am beginning to cry tears of sympathy for the banks.

Me too. Joking aside, an IVA is not a pain-free experience for anyone drowning in debt. Firstly, your creditors will agree to it precisely because it offers them more money than they would get by forcing you into bankruptcy.

They may well want you to pay them money out of your future income, quite possibly for five years. And the IVA, as a public declaration of insolvency, ruins your credit record.

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