Insolvencies hit record high

The number of people unable to meet debt repayments reached record levels in the second three months of this year, as more than 26,000 people were declared insolvent, official figures showed today.

The figure marked a 10% increase on the previous three months and a 66% increase on the same period last year. Analysts suggest the UK's £1 trillion combined debt could mean the problem will continue to grow.

At the end of a week that has seen all the major banks report an increase in bad debts, the government's Insolvency Service said 14,915 people were declared bankrupt in the second quarter of 2006. This was a 3.3% decrease on the figure for January-March this year, but a 32.5% increase on the number in April-June last year.

Meanwhile 11,105 people entered into individual voluntary arrangements (IVAs) with their creditors in the same period, 35% more than in the first quarter of 2006 and up 153.2% on the same period last year.

IVAs are an alternative to bankruptcy and allow a borrower to repay part of a loan to their creditor while the remainder is written off. They have grown in popularity as awareness of them has increased.

Separate figures from the Council of Mortgage Lenders (CML) showed the number of borrowers unable to meet their mortgage repayments was also increasing, with a rise in the number of homes repossessed in the first half of this year.

The CML said 8,140 properties had been possessed by lenders, a marked increase on the 5,690 possessed in the second half of last year and the highest figure since the first half of 2001.

The number of borrowers who were more than 12 months in arrears on their mortgage also rose, to 15,070 from 14,380 in the second half of 2005 and 12,580 in the same period last year.

However, there was a fall in the number of mortgages that were three to six months in arrears, and the number that were six to 12 month behind in payments levelled off.

The CML said payment difficulties had been driven by interest-rate rises between autumn 2003 and summer 2004.

Yesterday's base-rate rise would add to payment difficulties for some borrowers, it said. However, the effect should be limited as more people now have fixed-rate mortgages which shield them from any change.

The CML's director general, Michael Coogan, said the organisation was working with the government to see how more borrowers could reduce their risks by taking out long-term fixed-rate deals.

He added: "Repossessions are up, but remain historically low. Arrears have been stabilising, though the latest interest-rate rise may have a modest effect over time. But we continue to expect repossessions to run at levels of around 15,000 a year between 2006 and 2008, well below their long-run trend."

The Conservative's director of Policy, Oliver Letwin, said the rising number of insolvencies was evidence that the economy was "built on borrowed time".

Mr Letwin said: "As the economy fails to live up to Gordon Brown's expectations, the number of bankruptcies is rising faster and faster.

"There is a personal tragedy behind each of these insolvencies and this shows that many families are feeling the pressure of rising interest rates and rising fuel bills. Gordon Brown is doing nothing to help these families with more and more stealth taxes and ever increasing council tax."

Howard Archer, chief UK economist at consultancy Global Insight, agreed that it was likely figures for insolvencies and repossessions would continue to rise.

"With unemployment continuing to rise, utility bills soaring, many home owners stretched to the maximum and debt bills at record high levels, it seems highly likely that individual insolvencies and mortgage repossessions will climb markedly further over the coming months," he said.

"This danger has been magnified by the Bank of England raising interest rates this week."

KPMG's director of personal insolvency, Mark Sands, predicted the number of personal insolvencies in 2006 could reach 100,000.

"The increase in the number of people entering IVAs is causing concern," he said. "With these record levels courts have never been busier - we calculate that someone is entering insolvency every minute of the court's working day."

Changes to the law introduced in April 2004 mean that bankrupts are discharged after one year instead of three, which may be behind some of the increase.

Wider marketing of IVAs and bankruptcy by debt advice services, as well as increased publicity for agencies such as the Consumer Credit Counselling Service, have also made people who are struggling with debt more aware of their options.