Consumers warned as personal insolvencies soar to record high

Personal insolvencies soared to a record 27,644 in the third quarter as accountants warned that it was now "payback time" for consumers who have borrowed vastly beyond their means over the past few years.

The Insolvency Service figures were released yesterday just five days before the Bank of England is expected to increase the pressure on overstretched borrowers by putting interest rates up to 5 per cent from 4.75 per cent.

The figures sparked fears of dark times for retailers if debt-ridden consumers tighten their belts and resist the impulse to spend wildly in the run-up to Christmas. The spotlight was also turned on banks, who again faced accusations of irresponsible lending.

The seasonally adjusted personal insolvency figure was an increase of 55.4 per cent on a year ago and 5.7 per on the previous quarter. Bankruptcies came in at 15,416, up 26.6 per cent compared with a year ago, but Individual Voluntary Arrangements soared to 12,228, up 117.9 per cent on last year and 9.8 per cent on the previous quarter.

The rise of IVAs - which allow consumers to emerge debt free after five years if they and their creditors can reach agreement on reducing their debts - has been put down to aggressive advertising campaigns by companies offering to arrange them.

Company liquidations fell slightly to 3,235, down 0.4 per cent on the previous quarter and 4.3 per cent on a year ago. However, most experts believe it will not be long before they rise again.

Louise Brittain, the head of personal insolvency at Baker Tilley, said: "We are in the payback period. People are getting fed up with carrying these levels of debt and they are increasingly looking at filing for bankruptcy or IVAs.

"While the rate of increase has slowed, we are likely to end up with 100,000 to 110,000 personal insolvencies by the end of the year."

Ms Brittain also said her view was that some lenders were behaving irresponsibly: "I have a client who is disabled and her only income is disability benefit and yet she has been allowed to run up £60,000 of unsecured debt."

Ms Brittain added that the figures did not bode well for the high street in the run-up to Christmas.

And Liz Bingham, the London head of corporate restructuring at Ernst & Young, attacked the Chancellor's so-called "stealth" taxes as being partly to blame. She said: "The latest insolvency figures reveal that it has been a rocky few months for individuals and companies and the outlook for both is increasingly uncertain.

"UK households are already some of the most highly taxed in Europe from a combination of stealth taxes such as stamp duty, council tax, insurance tax and air-passenger tax."

She warned that forthcoming council tax and interest rate rises could have "major implications for the economy as consumer spend is one of the main drivers for a healthy economy".

Grant Thornton said house repossessions were likely to exceed 12,000 this year and that 38 per cent of all bankrupts were unemployed.