Bankruptcies hit record level as consumer debt reaches crisis point

The number of people going bust smashed through the 100,000 mark last year, throwing the spotlight on Britain's worsening consumer debt crisis.

Personal insolvencies in England and Wales totalled 107,288, the highest since records began in 1960, according to figures from The Insolvency Service yesterday. The staggering tally will stoke fears that more and more people are living beyond their means and struggling to cope with debt in an environment of higher borrowing and living costs. But it also reflects the recent relaxation of bankruptcy rules, as well as the plethora of debt management companies that specialise in organising individual voluntary arrangements (IVAs).

George Osborne, the shadow Chancellor, said: "Rising insolvencies are just the latest symptom of an economy built on debt and Gordon Brown is to blame. Behind every insolvency, there will be a personal tragedy, but taken together they add to a growing social problem."

IVAs, which allow people to write off some of their debt and pay the rest over a few years, have been the driving force behind rising insolvencies in recent years. But the quarterly breakdown of yesterday's figures revealed that they are levelling out, reflecting a tightening up of acceptance criteria by banks. IVAs rose by just 3.9 per cent in the final three months of 2006 against a 9.6 per cent increase in bankruptcies.

"Banks such as HSBC and Northern Rock have hardened their attitude towards IVAs," said Pat Boyden, a partner in the business recovery services practice at PricewaterhouseCoopers.

"What we have seen over the past few years is a tidal wave of pent-up demand being released as IVA companies became better known, but we may have reached a plateau. Instead, those who are unable to pay their debts, yet have their IVAs refused, will be forced to take bankruptcy as their only option."

Bankruptcies have also soared since new rules, which discharge bankrupts after 12 months or less instead of three years, were introduced in April 2004.

James Falla, managing director of Thomas Charles, a debt consultancy, predicted a jump in insolvencies in the first quarter of this year as thousands of households face up to Christmas over-spending. "One reason for this is the 'festive effect' where many people spend beyond their means during the Christmas period, and put off taking action to address their debts until the new year," he said.

Mr Falla said his clients came from all walks of life, from bank managers to refuse collectors, although most were males in their 30s and 40s. Many are self- employed people who have failed to put enough money aside to pay their tax bills. "We are also seeing more and more young people who have no assets and decide to declare themselves bankrupt because they feel they've got nothing to lose," he added. "The other day, a 22-year- old man walked into our office. He lived at home with his parents but owed £75,000 on credit cards. It's a cultural problem - a 'spend now, pay later' attitude."

Separate figures from the Department for Constitutional Affairs showed court orders for home repossessions soared to 22,827 in the fourth quarter, up 22 per cent on a year earlier, as a growing number of households failed to meet mortgage payments.

There was better news from the corporate sector, with the number of company liquidations falling marginally for the third quarter in a row. "This is consistent with the recent pick-up in profits growth and suggests that the worst of the impact of higher energy costs on firms' bottom lines is now over," said Vicky Redwood, an economist at Capital Economics.

Derek Piercey. Watch salesman. 44: 'Hardly a day went by when I wasn't offered more credit'

Derek Piercey ran into financial difficulties when he lost two jobs in quick succession. Both had carried generous car allowances and, following the redundancies, he was forced to sell the vehicles quickly and at a loss. With debts already mounting, the situation was compounded by poor financial decision-making, including taking out a high-interest consolidation loan. Before long, he had a wallet-full of credit cards and the situation had spiralled out of control.

"I got myself stitched up a bit over the loan, but I really can't blame anyone but myself," says Mr Piercey, a 44-year-old watch salesman from Basingstoke. "A big element of the problem was the fact that I couldn't stop spending. Things went from bad to worse - when you've got behind on payments, it's very hard to catch up."

A keen golfer, Mr Piercey splashed out on top-of-the-range clubs and an expensive holiday to America with his wife, Sarah. But he says it was the little things - clothes, going out for meals - that mounted up. "It all seemed very easy" he says. "Hardly a day would go by when I didn't receive a letter offering me more credit."

Things came to a head in July last year, by which time he had nine credit cards and owed £60,000. "The people who I had the loan with called one Saturday morning when I was out for a walk, and the reality of the situation suddenly hit me and stopped me in my tracks. I just thought, this is ridiculous, I can't carry on like this."

Mr Piercey decided to take out an IVA, paying back 45p of every pound he owed over five years. "I'm over the moon that I did it," he says. "It's not been easy, and some of the creditors have been very aggressive. It will be very difficult to get credit again - but that's a good thing."