Bankruptcies and repossessions rise

Further evidence of Britons' struggle to repay their debts was provided today, as reports revealed personal insolvencies and mortgage repossessions both rose in 2005.

Government figures showed that the number of people becoming insolvent had soared to its highest level since records began during the final three months of 2005.

A total of 20,461 people in England and Wales became insolvent during the quarter, 15% more than during the previous three months - which at the time was the highest figure since records began in the 1960s.

During the period, 13,501 people went bankrupt, nearly 11% more than in the three months to the end of September and 57% higher than the figure for the same period of 2004, the Insolvency Service said.

At the same time, the number of people taking out individual voluntary arrangements (IVAs), under which they agree to repay a set amount each month in exchange for interest on their debts being frozen, more than doubled year on year to 6,960.

The rise in personal bankruptcies has been blamed on the recent credit boom, which has seen Britons collectively build up debts of more than £1 trillion through mortgages, credit cards, loans and overdrafts.

However debt charity the Consumer Credit Counselling Service said the rise indicated that more people were finding solutions to their debt problems, rather than meaning more people were getting into trouble.

New rules introduced in the Enterprise Act mean that individuals can be discharged from bankcruptcy after just a year, so for many it has become an attractive way to clear debts.

But figures from the Council of Mortgage Lenders (CML) showing a 70% leap in the number of repossessions last year suggest people are still struggling with over-indebtedness.

In total 10,260 properties were repossessed by lenders, 5,630 in the second half of the year.

Although this marked a 22% increase on the first six months of the year, the CML said the number was still extremely low by historical standards and well below the peak of 38,930 recorded in the second half of 1991.

The number of mortgages falling into arrears also increased over the year. Some 59,700 borrowers were three to six months behind on their repayments during the quarter - 11% more than at the end of 2004.

In total, 106,000 borrowers were at least three months behind with their repayments and 13,820 were more than a year in arrears.

The CML said the figures were in line with expectations and that it expected to see further increases in the number of borrowers falling behind and facing repossession.

It forecast 12,000 repossessions in both 2006 and 2007 and 120,000 mortgages falling into arrears.

"Although the scale of increase is notable, the absolute numbers are still extremely small, and set to remain so," said the CML's director general Michael Coogan.

"Now would be a good time for borrowers to review their financial commitments.

"Cutting unnecessary spending, ensuring you have a suitable mortgage deal, and taking out suitable insurance such as mortgage payment protection insurance could make the difference between coping and falling into trouble."

Howard Archer, chief UK economist at consultancy Global Insight, said there was a real risk that the coming months could see further rises in the number of insolvencies and repossessions.

"With economic growth likely to remain below trend in the near term at least and unemployment set to continue rising, there is a very real danger that individual insolvencies and mortgage repossessions will climb markedly further over the coming months."

And he said that further rises could cause problems for the Bank of England's Monetary Policy Committee.

"Last August's 25 basis point cut in interest rates will have provided some relief - as would any further reduction over the coming months - although there is the danger that lower interest rates could encourage people to borrow more, thereby heightening the debt problem.

"This is something the Bank of England will need to keep a close eye on."

Useful link

Consumer Credit Counselling Service