Britain's Going Bust!

A record 26,000 people became bankrupt or insolvent between April and June. How bad will things get before we face up to our debts?

The Insolvency Service has just released its latest quarterly figures -- and they make for grim reading.

In the second quarter of this year, 26,021 individuals in England and Wales became insolvent, which is an all-time record. This is an increase of a tenth (10%) on the first quarter of 2006, and up a massive two-thirds (66%) on Q2 2005, when 15,645 people became insolvent.

On a brighter note, company liquidations in England and Wales fell to 3,265, down 5% on the previous quarter's figure, and 3% lower than the figure for the second quarter of 2005. What's more, compulsory liquidations fell to 1,226, down 14% from the previous quarter. This suggests that Britain's businesses are faring well, even if its debt-laden consumers are struggling!

What's staggering is the huge increase in the number of people choosing to enter into Individual Voluntary Arrangements (IVAs), rather than opt for bankruptcy, as the following table shows:

As you can see, the number of IVAs has more than doubled in a year, rising from just short of 4,400 in Q2 2005 to over 11,100 in April to June of this year, whereas bankruptcies actually declined between Q1 and Q2 2006. Hence, if the number of IVAs continues to rise at this blistering rate, it will soon overtake bankruptcy as the more common form of insolvency.

Still, it's worth putting the above figures into context. There are around forty million adults in England and Wales, so even if 110,000 people become insolvent during 2006, this is still only around 1 in 365 people, or 0.27% of the adult population. Even so, the unprecedented increase in insolvencies is just the tip of the iceberg as far as personal debt problems are concerned. For example, half-year results released this week show hefty increases in bad debts at the UK's biggest banks.

Nevertheless, I'm particularly worried about the rising number of IVAs, because, although an IVA is perceived to be less damaging than bankruptcy, it is far from being a soft option. For example, one advantage of an IVA over bankruptcy is that it allows the borrower to hang onto their home, car and other valuable assets.

Part of the reason why bankruptcies have increased is down to a change in the law two years ago, which made it easier to enter into, and be discharged from, bankruptcy. However, one debt charity recently reckoned that an IVA is appropriate for just 1 in 33 of its clients (3%), so why the enormous increase in IVAs?

Personally, I believe that the astonishing rise in the number of IVAs is down to one factor: the sheer number of newspaper and TV advertisements from debt management companies promoting IVAs as an easy way to dump debts. Many over-burdened borrowers see an advert along the lines of "Clear 80% of your debts today and enjoy one low monthly repayment!" and see it as salvation from struggling with excessive debts.

Indeed, some IVA providers are even targeting their advertising at people on low incomes, who are least likely to understand the financial implications of going down this route. However, as the Inside Money programme reported on BBC Radio 4 last week, many people on benefits or low incomes who enter into an IVA are unable to keep up their monthly repayments. In this situation, their Insolvency Practitioner has no alternative but to bankrupt them. Often, the repayments these people have made are gobbled up by admin fees, leaving their debt barely unchanged from its original level.

To be honest, if you're struggling with high levels of personal debt, the worst thing that you can do is reply to an ad at the back of the paper. Rather than dealing with vultures that profit from pushing you into an IVA, get some free debt counselling and support from a not-for-profit debt charity. The good guys in this arena include the Consumer Credit Counselling Service, National Debtline and Payplan.

Finally, with the cost of living rising ever upwards and interest rates starting to climb (the Bank of England's base rate rose 0.25% to 4.75% yesterday), our debt problems are set to worsen.