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Last Updated: Friday, 2 February 2007, 13:17 GMT
Record numbers of people go bust
Bar chart of rising number of insolvencies
The number of people who were declared insolvent in England and Wales rose to a new record of 107,000 last year.

That was a 59% increase on the year before, when 67,500 people went bust.

The rise was mainly due to a sharp increase in the number of people entering individual voluntary arrangements (IVAs).

The number of individual insolvencies also rose in Scotland and Northern Ireland, though not as fast as in England and Wales.

It is widely expected that the rising trend of personal insolvencies will continue this year.

But Pat Boyden, an insolvency specialist at the accountants PricewaterhouseCoopers, said he doubted that the increase would be as fast as in 2006.

"I wouldn't predict a huge increase this year - though the recent increases in interest rates may put the squeeze on unsecured borrowing," he said.

Bankruptcies, in which debtors typically lose all their assets, rose last year by 34% in England and Wales to 62,900.

But although these still outnumbered IVAs, the number of people choosing an IVA as a route out of insolvency more than doubled to 44,300.

Repossessions

Last year also saw a sharp rise in the number of repossession orders made against defaulting mortgage holders by county courts in England and Wales.

All creditors are worried about people dumping debt without them being in genuine financial hardship
Pat Boyden, PWC

According to the Department for Constitutional Affairs, they went up to 91,200 - a rise of 29% from 2005.

Although roughly half of all orders end up being suspended, with no subsequent eviction, the sharp rise in repossession orders being made is another important indicator of financial stress.

They have now doubled in the past two years after being fairly constant in the earlier years of this decade.

Earlier this week it was revealed that 2006 saw a 65% rise in the number of homes actually being repossessed by lenders, albeit this is still at a historically very low level.

IVAs slow down?

Despite the extensive publicity given recently to IVAs, the rise in their number almost ground to a halt in the last three months of last year.

HOW TO GO BUST
Bankruptcy: the traditional way of escaping overwhelming debt. Ends after one year, but you are likely to lose all your assets including your house to pay something to the creditors
IVA: A deal between you and your creditors, overseen by an insolvency practitioner. Less stigma, less chance of losing your home, but involves paying some of your debts in one go or over a number of years

There were just 4% more of them than in the previous three months.

By contrast, the last quarter of 2006 saw a sharp rise in bankruptcies, which were up by nearly 10% over the three months.

One possibility is that some debtors have been forced to choose bankruptcy recently because of a harder attitude being adopted by some lenders towards IVA agreements.

Banks such as HSBC and Northern Rock are now demanding a much higher level of prospective repayment before they will agree an IVA with a customer.

The industry standard is a repayment of 25p in the pound, but HSBC now asks for 40p in the pound.

"All creditors are worried about people dumping debt without them being in genuine financial hardship," said Mr Boyden.

Personal debt

The growing number of insolvencies is partly the inevitable fallout from the rising level of personal debt in the UK.

There are thousands of people who have substantial debt and will never be able to pay it off
Sue Edwards, Citizens Advice

"Citizens Advice bureaux dealt with 1.4 million debt problems in the last financial year," said Sue Edwards, of Citizens Advice.

"There are thousands of people who have substantial debt and will never be able to pay it off," she added.

In the past eight years the amount of non-mortgage debt held by people in the UK has doubled to 212bn, stimulated by the growth of the economy and relatively low interest rates.

However the past couple of years has also seen a rapid rise in the number of "debt management" companies who specialise in organising IVAs for their customers.

They are widely credited - or blamed - for encouraging people to use IVAs as a way of resolving their debts.

Their activities are being closely monitored by the authorities, and the Office of Fair Trading recently wrote to 17 of them, warning them to stop publishing misleading advertising on TV and in newspapers.

According to the accountants KPMG, lenders such as High Street banks wrote off 1.4bn last year as a result of customers proposing IVAs.



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