Page last updated at 10:53 GMT, Wednesday, 31 December 2008

Record numbers 'face insolvency'

Cash, cards and bills
Some people have been building up debt to pay household bills

Accountants KPMG are predicting that the number of people facing insolvency in 2009 will reach record levels.

The group estimates that 150,000 people in the UK will go bankrupt or enter official debt arrangements - up from an estimated 104,000 in 2008.

It expects people heavily in debt owing to spending on day-to-day expenditure or holidays will be "ill-equipped" to cope with the economic downturn.

The latest official figures showed that personal insolvency had risen sharply.

'Swelling debts'

Research by KPMG suggested that creditors had to write off at least 1.1bn in bad debts in 2008.

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
Individual voluntary arrangement (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
Debt Relief Orders: Planned for introduction in April 2009, these should allow consumers with debts of less than 15,000 and minimal assets or surplus income to write off debts without a full-blown bankruptcy

Those entering IVAs - when a deal is struck between creditors and the debtor - had an average debt of 47,800 and proposed to repay 38% of this amount, KPMG said.

These figures were at a similar level as in 2007 and featured debts built up on credit cards and loans to pay for holidays and to cover household bills, which had then spiralled.

It estimated that 2,500 people entered IVAs with debts of more than 100,000 in 2008.

"By the time people realise the extent of the problems, their total debts would have swelled by interest, charges and more borrowing to cover minimum repayments," said Mark Sands, KPMG's director of personal insolvency.

He said that the high levels of debt revealed that many people had no realistic hope of making their repayments.

This was likely to get worse as some would have used credit to pay for Christmas and sales spending, and now were looking ahead to a downturn when their jobs could be at risk.

"Those carrying high levels of debt will be ill-equipped to tackle the effects of the downturn such as a reduction in income or a period of unemployment," Mr Sands said.

"Many faced with these difficulties will find that their options may be limited. Formal insolvency will, for many, be the only way out."

'Keep talking'

He said it was important for creditors and debtors to maintain an "open dialogue" to help those struggling with debts.

In April, the government plans to introduce a new system to help those with relatively small debts avoid full bankruptcy proceedings.

Debt Relief Orders should allow people with debts of less than 15,000 and minimal assets or surplus income to write off debts without a full-blown bankruptcy.

The latest figures from the government showed that individual insolvencies went up by 8.8% in the third quarter of 2008 to reach 27,087 as the downturn started to bite.

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