Personal bankruptcies hit new record

Firms dealing with Britain’s debt problems warned tonight that one in 60 people were facing insolvency after the latest government figures showed that a collapsing economy led to record personal bankruptcies and a 50% jump in company failures late last year.

Industry specialists said the sharp rise in individual and corporate financial distress reported by the Insolvency Service for the last three months of 2008 was “the tip of the iceberg” and that rising unemployment and the credit crunch would deepen the debt crisis this year.

Official figures released today showed that the steepest economic decline in almost 30 years led to 19,100 people being declared bankrupt – a 22% increase on the fourth quarter of 2007.

A further 10,000 people took out individual voluntary arrangements (IVAs), under which interest on debt is frozen in exchange for set repayments each month.

The total of 29,444 people being declared insolvent was up 18.5% on a year earlier and is already running at higher levels than during the recession of the early 1990s.

David Mond, chairman of the Debt Resolution Forum, the trade body for IVA and debt resolution firms, said: “The government’s figures, showing that one in 400 adults became personally insolvent last year, are the tip of the iceberg.

“Not only are there an estimated 110,000 people currently in individual voluntary arrangements, but there are probably more than 700,000 people in informal debt management plans – and these are just the people who have decided to deal with their unsustainable debt, hundreds of thousands more are probably still struggling on.

“This means that 1 in 60 adults in England and Wales are dealing with unmanageable debt – nearly seven times the government’s figure.”

The 1.5% contraction in the economy in the wake of the financial market mayhem last autumn also claimed 4,607 companies – a 52% increase in liquidations on October-December 2007.

Economists warned that the level of bankruptcies was set to increase as unemployment rose and the problems caused by the credit crunch meant people were no longer able to borrow their way out of trouble.

Lending figures for December showed an increase in the number of people shifting their debt to personal loans and credit cards, many of them with higher interest rates than a year ago as banks increased the cost of unsecured lending. Financial advisers warned that this move, coupled with a clampdown by lenders on customers to extending their mortgages, was likely to increase further the pressure on people with high levels of debt.

Alan Tomlinson, a partner at the licensed insolvency practitioners Tomlinsons, said: “I have been an insolvency practitioner for over 25 years and have never seen so many companies, from all sectors, going to the wall.

“Trading conditions have never been so tough and given the bleak economic outlook, it could be some time yet before they begin to improve.

“The appalling economic conditions are claiming more and more victims, as companies in all sectors make redundancies or simply fail.

“What is especially interesting is that more people have gone down the bankruptcy rather than the IVA route, which is a reflection of the fact that lenders have tightened up the criteria for the acceptance of IVAs.”

Many customers have also avoided bankruptcy and an IVA following a trend among banks to offer debt management plans, which can delay repayments or spread them over a longer period.

These plans, like IVAs, often fail and debtors are forced into bankruptcy at a later date.

The Consumer Credit Counselling Service recently said it received record numbers of calls to its helplines in the first two weeks of January.

The Insolvency Service figures also showed a 75% jump in the number of people declared insolvent in Scotland during the final quarter at 5,807, although the figure was slightly down on the total for the previous quarter.

In Northern Ireland insolvencies increased by 39% year-on-year to 443 during the three months to the end of December.

Nick O’Reilly, president of the insolvency professionals’ trade body R3, said: “What today’s figures mean is that in 2008 we saw a staggering 350 people becoming insolvent in the UK every day. For 2009 our members believe this number will reach in excess of 430 people a day for the whole of the UK.

“The outlook is bleak for the next two years, when insolvency practitioners expect to see in excess of 158,000 personal insolvencies annually.

“We’ll start to see the knock-on effects of increasing business failures and redundancies on personal financial situations,” he said.

Personal bankruptcy hit a record level and company failures soared by 50% as the collapse in the economy in the final three months of 2008 took its toll, official figures showed today.

Data from the Insolvency Service revealed that the steepest decline in output in almost 30 years led to 19,100 people being declared bankrupt – a 22% increase on the fourth quarter of 2007.

A further 10,000 people took out individual voluntary arrangements (IVAs) under which interest on debt is frozen in exchange for set repayments each month.

The total of 29,444 people being declared insolvent was up 18.5% on a year earlier and was higher than during the recession of the early 1990s.

The 1.5% contraction in the economy in the wake of the financial market mayhem last autumn also claimed 4,607 companies – a 52% increase in liquidations on the October to December period of 2007.

Economists warned that the level of bankruptcies was set to increase as unemployment rose and the problems caused by the credit crunch meant people were no longer able to borrow their way out of trouble.

Howard Archer, chief UK and European Economist at IHS Global Insight, said: “Unfortunately, the marked rise in the number of individual insolvencies in the fourth quarter of 2008 is a harbinger of what is very likely to be seen through 2009.

“Deep economic contraction, sharply rising unemployment, higher debt levels, lower equity prices, and more and more people being trapped in negative equity will exact an increasing toll over the coming months.

“While the substantial cuts in interest rates by the Bank of England will obviously help some people, they are likely to be insufficient to save many from insolvency.”

Alan Tomlinson, partner at licensed insolvency practitioners Tomlinsons, said: “I have been an insolvency practitioner for over 25 years and have never seen so many companies, from all sectors, going to the wall. Trading conditions have never been so tough and given the bleak economic outlook it could be some time yet before they begin to improve.

“The appalling economic conditions are claiming more and more victims, as companies in all sectors make redundancies or simply fail.

“What is especially interesting is that more people have gone down the bankruptcy rather than the IVA route, which is a reflection of the fact that lenders have tightened up the criteria for the acceptance of IVAs.”

The Insolvency Service figures also showed a 75% jump in the number of people declared insolvent in Scotland during the final quarter at 5,807, although the figure was slightly down on the total for the previous quarter.

In Northern Ireland insolvencies increased by 39% year-on-year to 443 during the three months to the end of December.

Nick O’Reilly, president of insolvency professionals’ trade body R3, said: “What today’s figures mean is that in 2008 we saw a staggering 350 people becoming insolvent in the UK every day. For 2009 our members believe this number will reach in excess of 430 people a day for the whole of the UK.

“The outlook is bleak for the next two years, when insolvency practitioners expect to see in excess of 158,000 personal insolvencies annually.

“We’ll start to see the knock-on effects of increasing business failures and redundancies on personal financial situations.”

Friday 6 February 2009 20.22 GMT
Larry Elliott, economics editor, and Phillip Inman

Source: The Guardian