Bankruptcies set to soar next year despite good news, experts warn

Insolvency experts are warning that the numbers of consumers declaring bankruptcy is set to soar next year, despite the release of figures revealing a fall.

Data from the Insolvency Service showed the number of people becoming insolvent fell by 5 per cent between July and September. Bankruptcies were up 2.2 per cent to 15,833, but there was a drop in Individual Voluntary Arrangements (IVAs), which fell to 10,239 – down 14.3 per cent compared with last year.

IVAs are debt arrangements that can help prevent people from going into bankruptcy, but they have come under increasing criticism over suitability for certain consumers and the arrangement fees charged by providers.

Commentators said the drop in IVAs masked the true picture. R3, the Association of Business Recovery Professionals, said many debtors are being forced by banks and creditors into debt management plans which provide no protection for debtors.

Nick O' Reilly, vice-president of R3, said: "The reduction in the number of IVAs is a direct result of the banks' imposition of hurdle rates before they will accept an IVA. This does not mean that there are fewer indebted individuals, but rather that they are being forced either into bankruptcy, or debt management plans, which could last indefinitely and ultimately still result in bankruptcy."

John Hall, chief executive of personal debt solutions provider newtomorrow.com, said: "There is a dam waiting to burst and the cracks are starting to appear."

Separate figures from the Ministry of Justice showed that home repossessions in England and Wales rose by 1 per cent in the third quarter to 34,717 compared with the same period last year. However, the number of orders for home repossessions dropped by about 1 per cent to 23,806, as many of the claims failed to result in repossession orders.

David Stubbs, senior economist at the RICS, said: "As the market slows, we expect the numbers falling behind on their mortgage repayments to increase. We forecast this will lead to 43,000 repossessions in 2008."

This week, the Council of Mortgage Lenders predicted the number of repossessions could rocket by 50 per cent next year as borrowers feel the pinch from five interest rate rises since August and a tightening in lending criteria amid the recent credit crunch.

The economist Howard Archer, of Global Insight, cautioned that the Bank of England may need to cut rates to ease the pressure on over-stretched borrowers. "While a likely cut in interest rates before long will help matters, there is a danger it could be too little, too late for many people," he said.