Flashing one of these can be more trouble than it's worth Personal insolvencies in England and Wales have hit another record high as interest rate rises take their toll on already over-extended households. The number of individuals declared bankrupt rose to 9,156 in the third quarter, up 4% on the quarter, and 28.8% on the same period in 2003. Company liquidations fell 5.6% on the quarter and 12% on the year.
The Bank of England has raised the cost of borrowing five times to 4.75% in an effort to dampen consumer spending. The figures, from the Department of Trade & Industry (DTI) also showed that 2,811 people took out Individual Voluntary Agreements (IVAs) over the quarter. IVAs allow interest on debts to be frozen in exchange for people making regular monthly payments. The number of people taking this option rose 13.6% on the quarter - the highest ever recorded - and 40.6% on the year.
Rates bite
The figures show that higher interest rates have left many people struggling to repay their debts, according the government's Insolvency Service. The numbers are more likely to go up than come down.
Desmond Flynn, Insolvency Service People who have signed up to seductive credit deals are also vulnerable to sudden changes in personal circumstances, such as accidents or loss of unemployment, it said.
"The two things linked together imply the numbers are more likely to go up than come down," said Desmond Flynn, inspector general of the Insolvency Service. The Citizens Advice Bureau agreed that changes in personal circumstances were partly driving the acceleration in insolvencies. "When people's circumstances change, it can often be quite minor but enough to tip people over the edge when it comes to paying off their debts," said Sue Edwards at the Citizens Advice Bureau.
Enterprise Act
The increase in personal insolvencies is also being fuelled by an increase in the number of people declaring themselves bankrupt, rather than being forced into bankruptcy by a creditor, accountants KPMG pointed out. Many bankrupts are now discharged from the effects of bankruptcy after only six months, whereas three years were previously more typical
Steve Treharne, KPMG Nearly two-thirds of personal bankruptcies are entered into voluntarily - the highest proportion ever.
Enterprise Act reforms which came into force in April make it easier for bankrupts who are in a position to make repayments on what they owe to negotiate a deal with creditors. This means creditors get a better return than they would have done if full bankruptcy procedures were adopted. The Act allows for 'honourable bankrupts' to be discharged more quickly, but also can extend the restrictions of bankruptcy for up to 15 years. "As these figures reveal, more people are making themselves bankrupt which suggests bankruptcy is now seen as a more acceptable way of dealing with debt difficulties," said Steve Treharne, head of personal insolvency at KPMG. "I suspect this is a result of the perceived simplification introduced by the Enterprise Act.
"Many bankrupts are now discharged from the effects of bankruptcy after only six months, whereas three years was previously more typical." The bankruptcy situation for UK businesses, however, has been less bleak. As personal insolvencies are growing, company bankruptcies have gone in the opposite direction. During the third quarter 2,975 companies went into liquidation in England and Wales, the lowest quarterly increase on record.
This improved environment for business can be put down to low interest rates, high employment and steady GDP, said accountants PricewaterhouseCoopers (PWC) When they do hit rocky times, there appears to be a marked shift towards administration from the traditional creditor led receiverships. Again this can be attributed to a greater take-up of the Enterprise Act, which gives firms more flexibility to restructure their business. However, small businesses and the self-employed are much less able to ride out economic storms than their larger counterparts.
Insolvencies in the self-employed sector have risen by 130% year-on-year, the DTI's figures showed. "We are seeing a marked shift towards administrations as stakeholders take a more inclusive approach to the insolvency process," said Mike Jervis, of PWC. "What is of concern, however, is the number of small self-employed businesses which are currently failing."
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