Page last updated at 10:20 GMT, Friday, 7 August 2009 11:20 UK

Personal insolvency at new record

Cut up credit cards
More people are becoming insolvent, but fewer firms are going bust

The number of people being declared insolvent has hit a new record in England and Wales.

There were 33,073 personal insolvencies in the second quarter of 2009, said the government's Insolvency Service.

That was a 9% rise on the first three months of the year, and 27% more than in the same period last year.

The number of companies going bust in England and Wales continued to fall, down by 14% on the previous quarter but still 23% higher than a year ago.

"Overall [personal insolvency] levels will continue to increase throughout 2009, with a record level of 140,000 or more expected by the end of the year," predicted Mark Sands of the insolvency experts Tenon Recovery.

New procedure

In April, a new form of personal insolvency was introduced, called a Debt Relief Order (DRO).

The sharp rise in the number of individual insolvencies is a reflection of the ongoing fallout from irresponsible borrowing in the good years
Alan Tomlinson, insolvency expert

Counted for the first time, there were 1,978 DROs in April, May and June.

The DRO is a new and cheaper form of insolvency procedure aimed at helping people wipe the slate clean if they have debts of less than £15,000 and few assets.

On Thursday, the debt advice charity, the Consumer Credit Counselling Service (CCCS) said they were the "best solution" for many people in debt, and predicted that they would eventually outstrip bankruptcies.

"As a result, total bankruptcies may soar," said Malcolm Hurlston of the CCCS.

"But that will be good news rather than bad, since many more people in serious debt will have found the right solution.

"In the past, stigma and cost have put people off going bankrupt, in circumstances when it would have been best for them and neutral for their lenders," he added.

Personal insolvency

The recession has been driving up the number of personal insolvencies since the end of 2007.

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: Introduced in in April 2009, these allow consumers with debts of less than £15,000 and minimal assets or surplus income to write off debts without a full-blown bankruptcy

In the last three months of that year, 23,830 people went bust.

The number doing so now has risen by nearly 40%.

Within the overall figure of 33,073 for the second quarter of this year, formal bankruptcy orders dropped to 18,870 from 20,446 in the previous three months.

But the overall personal insolvency figure was pushed up by the advent of the new DROs, as well as a big bounce back in the use of Individual Voluntary Arrangements (IVAs), which rose in the quarter by 25%, to 12,225.

Alan Tomlinson, of the Manchester based insolvency firm Tomlinsons, said many of the people he was dealing with were in very serious difficulty.

"The sharp rise in the number of individual insolvencies is a reflection of the ongoing fallout from irresponsible borrowing in the good years and people living beyond, in many cases way beyond, their means," he said.

"People need to be very wary of entering into an IVA, as in many cases it simply isn't the right solution. Other options such as bankruptcy may be more appropriate," he added.

Company insolvencies

The number for firms going under through receiverships, administration or voluntary arrangements went down for the second quarter in row.

But Richard Fleming, UK head of restructuring at the big accountancy firm KPMG, warned that this trend was unlikely to continue.

"The predicted lull during the July holiday season just hasn't materialised, as we've seen a swathe of insolvency appointments being made, across all sectors," he said.

"We see this trend continuing well into August and probably for the second half of the year.

"We're seeing that lenders are acting with more certainty as they appear to be taking more decisive action on individual cases," he warned.

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