Rise in bankruptcies fuels household debt fears

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The number of people going bankrupt has hit its highest level since the last recession, triggering fears Britain is on the brink of a debt crisis that could plunge millions of households into financial ruin.

Almost 9,000 people threw in the towel in the three months to June, equivalent to 100 a day and a 14 per cent surge on a year earlier, the Department of Trade and Industry said yesterday. This is highest level since the winter of 1993 when the UK was emerging from a slump that had left millions of households trapped in negative equity as house prices crashed and interest rates rocketed. "If this rise is anything to go by, then we could be heading back to the dark days of the early Nineties," said Alan Bradstock, a partner at accountants Langley and Partners. It comes just days after mortgage industry leaders warned the Government against "complacency" as official figures showed consumers were taking on debt at the fastest pace since records began.

Households borrowed almost £10bn in June, the largest monthly increase since 1993 as mortgage and unsecured borrowing hit all-time highs. Opposition parties, government regulators, lenders and independent analysts are increasingly concerned that debt is escalating at an unsustainable pace. "The growing debt crisis is already beginning to bite," said Vince Cable MP, the Liberal Democrats' trade and industry spokesman. "With personal bankruptcies soaring, people may regret borrowing so much if the economy turns even slightly."

Michael Howard, the shadow Chancellor, added: "With the explosion of personal and government debt, and the likely pressure on interest rates, alarm bells should be ringing at the Treasury."

Earlier this week, the Council of Mortgage Lenders said households might not be prepared for a rate rise and warned of the "risk of complacency".

The DTI said a number of factors affected the number of insolvencies, including the availability of credit and unemployment. A spokesman said: "While there is evidence to indicate an increasing trend in the number of individual insolvencies, it is not at the level seen in the early 1990s."

There is growing concern banks are lending to riskier clients in the chase for business. Earlier this year the Financial Services Authority said it was worried that less well-off households were saddling themselves with debt. Malcolm Shierson, a partner at accountants Grant Thornton, said: "The increasing availability of credit at incredibly cheap rates is working to plunge more people into the spiral of debt with their financial imprudence fuelling these figures."

As well as the personal misery for those in debt, analysts are worried about the risk of a sudden crash in consumer spending and house prices if borrowers find themselves unable to repay their loans. John Butler, UK economist at HSBC, said it showed how vulnerable the economy was. "The fundamentals do not get better than this for the consumer, yet still insolvencies are already rising," he said. "Bad news lies ahead for the consumer, either in the form of rising unemployment or interest rates."

Patrick Boyden, a partner at PricewaterhouseCoopers, the accountants, said: "The sharp increase in individual insolvencies should ring alarm bells about the downside of the expansion in consumer credit."