Personal bankruptcies hit record high as rate rises bite

The number of bankruptcies hit an all-time high over the autumn as households struggled to cope with the burden of rising interest rates, Department of Trade and Industry figures showed yesterday.

There were almost 12,000 personal insolvencies in the third quarter of the year, the largest number since records began in 1995 and a surge of 31 per cent on a year ago. This was made up of 9,156 people made bankrupt and 2,811 people who took advantage of a voluntary arrangement - a 40 per cent rise.

The explosion in the number of personal failures covers a period that has seen the Bank of England raise rates by 1.25 percentage points - a 35 per cent increase in borrowing costs in seven months.

Insolvency experts warned many households faced being squeezed between the rising cost of borrowing and falling house prices.

Mike Gerrard, a specialist at accountants Grant Thornton, said many people with large debts had borrowed against the value of their home to pay off credit and store cards.

"Any reduction in housing values could see this popular 'get out clause' disappear and plunge ... people standing on the brink of insolvency into a spiral of debt that is likely to end in bankruptcy," he said.

Patrick Boyden, a partner at PricewaterhouseCoopers, said the sharp increase in voluntary bankruptcies highlighted a "cultural shift" towards seeing bankruptcy as acceptable.

But Nick Hood, a partner at Begbie Traynor, said there was a danger if people saw bankruptcy as an "easy" way out of debt problems. "People should think carefully about seeking bankruptcy because of the repercussions affecting personal credit ratings and the cost of future borrowings," he said.

The problems highlighted by yesterday's DTi figures are likely to relate to unsecured borrowing rather than mortgage debt as home repossessions are still close to historic lows.

Michael Saunders, an economist at Citigroup, said: "The rise in insolvencies is not a symptom of widespread distress in serving debt but a more narrowly focused problem of high levels of unsecured debt among a smaller number of people," he said.

A study by the Bank of England earlier this year found that exposure to debt problems was concentrated on a small high-risk group and that base rates would have to hit 9 per cent before mortgage costs hit the levels seen at the peak of the late 1980s property boom.

The DTI figures also showed that the number of corporate failures were 12.0 per cent lower than a year ago and as a share of the number of companies were at a 20-year low.