Record numbers of Brits are declared insolvent

The longest recession in history has forced a record 134,000 Brits to default on their debts. What does this mean for you -- and how can you spot and avoid financial meltdown?

The number of personal insolvencies declared in England and Wales rose 24.9% last year to 134,142 - the highest number ever recorded.

Official figures from the Insolvency Service showed 35,574 individuals became bankrupt or insolvent in England and Wales during the final quarter of 2009. By contrast, just 28,471 insolvencies were recorded in the final quarter of 2008. Of course, this steep jump should come as no surprise, as the UK has only just emerged from its longest and steepest recession in modern history.

Going, going, gone...

There are three forms of insolvency open to people whose personal finances go into total meltdown: bankruptcy, an Individual Voluntary Arrangement (IVA) or a Debt Relief Order (DRO). You can learn more about these three procedures here.

DROs were introduced on 6 April 2009 as a new route to insolvency for borrowers with total debts under £15,000 and total assets under £300. Despite this, we've clocked up 11,831 DROs in just nine months, as you can see from the following table:

Personal insolvencies in England & Wales from 2000 to 2009

As you can see, there were almost 3½ times as many bankruptcies last year as there were in 2000 -- a rise of 246%. In addition, there were six times as many IVAs in 2009 as in 2000 (up 497%). Overall, personal insolvencies increased by a factor of 4½ during the Noughties; a rise of 354%.

There was a lull in 2007 and 2008, when insolvency numbers actually declined. Sadly, going bust came back with a vengeance in 2009, rising by over a quarter (25.9%) on 2008, to the highest number since records began.

Bad news for Britain

In some ways, this explosion in financial failure is a predictable fallout from the huge boom in easy credit. Between 1997 and 2009, personal debt almost tripled. Hence, it's no surprise that insolvencies have followed a similar upward path, especially given the credit crunch and economic downturn of the past two years.

Still, you don't need to be a genius to figure out that soaring personal insolvency has a negative impact on the UK. Financial meltdown can lead to people losing their homes and/or jobs, which puts a heavy strain on our already stretched economy.

In addition, when people go bust and can't pay their debts, others lose out. Companies report lower profits, plus lenders see a huge upswing in bad debts. This creates knock-on effects across the nation, such as higher costs of borrowing and increased job losses. All in all, insolvencies -- both personal and corporate -- are seriously bad news for Britain at individual and national levels.

Six signs that you're struggling

The one piece of good news is that, thankfully, insolvency is fairly rare. Even in these tough times, only 0.31% of adults -- about 1 in 325 -- went bust in 2009. Even so, going bust is a painful process, no matter which route you go down.

So, what can you do to avoid this danger? Here are six warning signs:

1.    You don't know the numbers

When you don't know what's coming in and going out, this is the first sign that you may be losing control of your household budget. If you can't measure it, then you can't manage it -- so make sure that you keep an accurate, up-to-date record of all your income and outgoings. Use lovemoney.com's online banking service to view all your bank accounts and credit card transactions with a single log-in. This will allow you to categorise your spending so you can see where the problems lie. Read this guide to budgeting from debt charity CCCS for more help.

2.    You bury your head in the sand

Another sign that your finances may be getting out of control is when you become a financial ostrich* and bury your head in the sand. When you stop opening your bank and credit-card statements, that's when you know you're heading for trouble. Obviously, leaving the problem to fester will only make it worse.

* By the way, it's a 2,000-year-old myth that ostriches bury their heads in the sand when in danger. In a twenty-year study of 30,000 ostriches, this never happened even once!

3.    You rob Peter to pay Paul

Back in the Nineties, I had disastrous debt problems. I knew things were out of control when I started using credit-card cheques from one lender to meet my monthly repayments to another. If you're forced to borrow in order to keep the ball rolling, then the 'debt abyss' awaits.

4.    You have problems paying basic bills

Some bills are a much bigger priority than others. In order to keep a roof over your head -- and avoid fines and prison -- you must pay THEM FIRST:

Tax (Council)

Hire purchase

Electricity and gas

Maintenance and child support

Fines

Income Tax

Rent or mortgage

Second mortgage

Television Licence

If you're having trouble paying these vital bills, then that's one more worrying sign.

5.    You keep slipping into the red

You may find that you frequently have 'more month than money'. In other words, you go overdrawn well before payday, which can lead to ridiculously steep penalty fines. Likewise, paying your credit-card and other bills late or missing payments is another red flag warning you that your finances are on a slippery slope. Again, using online banking could help here, as you can easily see when you're spending too much this month - before any problems actually arise.

6.    You lose your job, bonus or overtime

In a large number of cases, financial collapse is brought on by some external event, such as redundancy, illness, or cutbacks to overtime or bonuses. If your finances are right on the financial limit and your income suddenly falls or ceases, then this can push you over the edge into insolvency.

The worst is yet to come

Most British households have less than two months of living expenses stashed away, so millions of us are just weeks away from financial collapse. Obviously, until we start living within our means, the meltdowns will continue.

Lastly, I've no doubt that insolvencies will continue to increase into 2010 and beyond. History shows that financial breakdowns continue to rise even when recessions end. Indeed, when interest rates start to climb (as they surely must), taxes go up, and government spending is cut, there may be even sharper increases in insolvencies...

Get help from lovemoney.com

If you're nervous about your financial future, then get help from lovemoney.com and its users.

First, read our Dealing with Debt blog, written by debt charity CCCS. You may also find it useful to take this debt test on the BBC website.

Next, read the hints and tips in this great goal: Lower your household bills

Also, watch this video: The cost of credit-card debt

And finally, if you have any questions, then why not quiz fellow lovemoney.com users in our Q&A section?

More: Get a free credit report from Experian | Five top tips for dealing with debt| I can't survive until payday!