Loans boom turns to bust

Nearly 30 per cent more people went bankrupt in the second quarter of this year than in the same period last year, taking the number of personal insolvencies during this period to a record 11,214, says the Department of Trade and Industry.

Accountant Grant Thornton reckons that 40,000 people will have gone bust by the end of the year. With £1 trillion of debt under our belts this is no great surprise, although the sharp rise in insolvencies is almost certainly due, in part, to new bankruptcy laws introduced on 1 April.

These reduced the time before a bankrupt's debts are written off from three years to one. Accountants believe that many people delayed bankruptcy to take advantage of the new rules.

However, even if the new figure is a blip we can still expect to see many more people going bankrupt because of the reduced period of penury involved and because rising interest rates will tip some over the edge. Banks may have to write off tens of thousands of pounds in interest as credit card debtors avail themselves of the ability to wipe out debts after a year.

The financial penalties of bankruptcy are severe and even a year is not a soft option. But one benefit for us all could be that lenders take greater care over the amount of credit they hand out.

The record number of people going bankrupt still represents a tiny proportion of all borrowers, and consumers seem generally to be shrugging off the rising cost of borrowing.

But beware: the full effect of dearer borrowing may not be felt for several months; there could be acute pain for borrowers who have so far been cushioned by special deals or loans that are reviewed annually.

These borrowers would be wise is to start planning now. Watch your lender's standard variable mortgage rate, ask for a monthly repayment quotation at that level, and budget for the difference.

You may not have to pay as much as that: cheaper options may available next year. But you will reduce your chances of joining those bankruptcy statistics if you do some homework now.