Bankruptcies hit record high

The number of individual insolvencies has risen 46 per cent in the last year to reach record highs.

New government figures show that bankruptcies rose 30.9 per cent and Individual Voluntary Arrangements (IVAs), an alternative to bankruptcy, rose 95 per cent in the three months to September, when compared to the figures for the same period last year.

"The very dramatic increase in the number of IVAs shows that record numbers of people are trying to deal with their financial difficulties without recourse to bankruptcy," said Desmond Flynn, chief executive of the Insolvency Service.

"They know that bankruptcy is not an easy option and that if bankrupts can pay towards their debts, they will pay. Discharge from bankruptcy now happens after one year and not three, but bankrupts are now liable to make contributions from their income for three years. Bankrupts have agreed to pay some £9 million this year towards their debts."

But the rise could not simply be explained by the change in the law to introduce IVAs.

Howard Archer, chief UK economist at consultancy Global Insight, noted: "Even allowing for the fact that recent changes in the legislation have made it more attractive for people to register as insolvent to deal with their financial problems, the very sharp jump ... highlights the fact that many people have borrowed to their limits.

"This has made them vulnerable to the higher interest rates that resulted from the Bank of England's tightening of monetary policy between November 2003 and August 2004 [when interest rates were raised five times], as well as to rising unemployment and extended below-trend growth."

Insolvency expert Philip Long, from business advisers PKF, attributed the rise to a fundamental shift in attitudes to debt.

"Lifestyle expectations have changed. Fifty years ago buying on credit was the exception and a last resort for many. Nowadays credit is so easy to obtain that people buy before considering whether they can afford to repay the debt and with little fear of what will happen if they cannot," he said.

But insolvency - whether through IVAs or more traditional bankruptcies - should not be entered lightly.

"Any insolvency procedure will affect a person’s future credit rating and they might find that their career is adversely affected – for instance, many professional bodies do not permit membership if a person has been subject to a bankruptcy restriction order or undertaking," Mr Long warned.

But things are looking up.

Mr Archer noted: "Latest evidence suggests, though, that consumers are trying to curb their borrowing and improve their balance sheets.

"Consumer credit has risen at a reduced rate in recent months, while the savings ratio picked up to five per cent in the second quarter of this year, having averaged just four per cent in 2004 (its lowest level in more than 40 years).

"However, the continuing need for many people to repair their balance sheets is likely to limit consumer spending for some time to come."

Being declared bankrupt sees your slate wiped clean - eventually.

You lose control of all of your assets, including the family home, and have your debts written off. You are only allowed to keep things that are needed for work or for household purposes (i.e. bedding).

But in addition to an official receiver being able to sell almost everything you own, being made bankrupt means - for at least a year - you are barred from a string of jobs.

Additionally bankrupts need court permission to do other jobs and the bankruptcy order stays on your credit record for six years - making it far harder to open accounts, get credit cards or a mortgage.