Record numbers of people will become insolvent over the next two years accountancy firm KPMG announced this week.

They claim that at least 130,000 people will become bankrupt or take out an individual voluntary arrangement during 2008.

An IVA is a legally bound agreement that ensures creditors will not take insolvency action against whilst a debtor pays what he can afford for an interim period. Approximately two thirds of people who enter into an IVA are homeowners.

KPMG also predict that there will be a record-breaking 40,000 people going bankrupt or entering into an IVA in the first quarter of 2009 – 10,000 people more than in the same period last year.

KPMG state that rising mortgage costs and general day-to-day living will tip most people over the edge.

With the average mortgage standing at £158,000 and energy and food bills rising at an inflation busting pace, many families will need to pay out at least £2000 more per year to avoid going under financially.

Figures for insolvency in January to March this year shows that there was actually a small fall in insolvencies, this however seems to be only a temporary respite.

Economic growth fell to 0.4% in the first quarter of this year – in the same period last year it was 0.7%

This suggests that the Chancellor - Alistair Darling will not meet his forecast of 2% growth for 2008, outlined in April’s budget. Economists all seem to suggest that this is only the beginning of a deep and prolonged economic slowdown.

The number of IVAs transacted in the last quarter of 2007 plummeted by 27.3% on the same period the previous year as creditor approval criteria tightened.

There were 9,188 agreements placed in the fourth quarter of 2007, prompting many industry figures to warn again on the impact the stringent criteria from The Insolvency Exchange is having on the market.

Beverley Budsworth, managing director of The Debt Advisor, said it is not surprising to see the numbers of IVAs continuing to fall throughout 2007.

She explained: “The IVA industry has seen a turbulent year; The Insolvency Exchange (TIX) introduced IVA fee capping arrangements and some creditors (banks) introduced hurdle rates of 40% or simply rejected the IVA's put forward.

“These factors have made the management of many smaller IVAs economically less viable.

"In-turn, we have seen share prices of some larger AIM-listed IVA providers crash, forcing them to submit less IVA applications as they cut marketing spend, concentrating on more informal debt management plans.”

Total personal insolvencies for 2007 stood at 106,645 – with bankruptcies at 64,480, 2.4% higher than in 2006. There were 3,135 corporate liquidations in the fourth quarter of 2007.

However, chartered accountancy firm, Benedict Mackenzie, also warned that figures on corporate insolvencies do not tell the full story.

Rupert Mullins, partner at Benedict Mackenzie said: “The 32% drop in the number of company insolvencies flies in the face of recent reports of a downturn in the economy.

“It appears that many companies are weathering the storm for now, but if economic conditions do not improve over the next few months, we expect to see the number of insolvencies increase significantly by the time of next quarterly report.”

Source: Niche Personal Loans

A record number of people will be declared insolvent this year, as high levels of debt and the impact of the credit crunch take their toll on overstretched borrowers, it was predicted today.

Accountancy firm KPMG said it expected more than 130,000 people to be declared bankrupt or enter into an individual voluntary arrangement (IVA) with their creditors, up from 109,615 this year.

IVAs allow borrowers to restructure their debts so they can make affordable monthly payments for a fixed period of time and have their remaining debts written off at the end of that period.

This year, the average debtor entering an IVA owed £50,300, although more than 2,500 people are thought to have had debts exceeding £100,000.

The average proposed repayment was 38% of debts - £19,100 for the average debtor - KPMG said. As a result, £1.3bn was written off by creditors.

Mark Sands, director of personal insolvency at KPMG, said: "This high average level of debt clearly indicates that too many people have borrowings that they have no realistic hope of repaying.

"Any excessive spending over Christmas and at the New Year sales, especially where goods are paid for on credit, risks tipping even more consumers over the edge."

Sands said the credit crunch would also have an impact, as lenders became more wary about who they accepted for credit cards and secured loans.

He warned: "Those in difficulty will find that their options are becoming limited – formal insolvency will for many be the only way out."

The number of personal insolvencies has more than doubled since 2004, when 46,650 people were declared bankrupt or entered an IVA.

The growth has been driven by a surge in the number of IVAs, following heavy marketing by debt management companies.

However, lenders have been cracking down on the plans, with some refusing to accept them and others raising the hurdle rate – the amount they are willing to accept as repayment – to 40p in the £1.

KPMG said its research showed 17% of people had had an application for an IVA turned down this year, compared with 15% in 2006.

A new code introduced in February will oblige a lender who rejects an IVA to give a specific reason for doing so.

Source Guardian unlimited

THE ultimate in no-fuss bankruptcies has been put before Parliament for approval. To qualify, you need only persuade a public official that there is no way you can ever pay what you owe. One year later, your insolvency would be discharged and your debts written off. No courts would be involved.

Banks are alarmed by the proposed super-fast, fuss-free bankruptcy for those unable to pay off debts of up to £15,000. The measure is contained in a Bill put before Parliament earlier this month. Under the plans, people with minimal assets or income would be granted a debt relief order (DRO) after a simple interview at a local Official Receiver's office.

The order would subject the debtor to the same restrictions as a bankrupt for 12 months. Privately, one senior banking source suggested that the 'quickie' bankruptcy culture could lead to banks curbing their lending to poorer sections of society, leaving the field free for 'sub-prime' lenders or even loan sharks.

The provision included in the Tribunals, Courts and Enforcement Bill, is the latest in a string of legal changes aimed at making life easier for people who want to declare themselves insolvent.

Eric Leenders, executive director of the British Bankers' Association, said: 'We have to be very careful that with the whole panoply of legislative change we are not suggesting that walking away from your debts is more expedient than honouring agreements.'

Spiralling numbers of personal bankruptcies and a rise in the number of people going into individual
voluntary arrangements (IVAs) - under which creditors get back only part of what is owed - have recently
triggered criticism from senior bankers.

In August, Lloyds TSB chief executive Eric Daniels attacked those with a carrdicr attitude to repaying
their debts. In the same month, WSBC chief executive Michael Geoghegan criticised debt-advice companies that urged people to declare bankruptcy.

In 2002, the law was changed and the period during which a bankrupt person was prevented from leading a normal financial life was cut from three years to just 12 months. Personal insolvencies have rocketed,
with a 26.6 per cent rise in the number of bankruptcies to 15,416 in the third quarter compared with the
same period in 2005, and a 117.9 per cent surge in the number of IVAs in the third quarter to 12,228.

One senior source in the debt-counselling industry predicted that the number of DROs could soon eaual
the existing total of bankcruptcies and IVAs put together - more than 27.000 each quarter. It is thought that the Official Receivers' service, funded largely out of its own fees, can hire any additional staff required.

Britain's leading debt-advice charity, the Consumer Credit Counselling Service, is to start providing IVAs
from next spring. This will put the service in direct competition with commercial providers, some of whom have been criticised for misselling IVAs to collect the fees.

More and more people are getting caught up in our ballooning debt crisis. One person goes bust every minute of the working day and home repossession applications show the biggest increase since the housing crash of the early 1990s.

The recent rise in interest rates can hardly have helped, especially as it followed record fuel bills and council tax payments.

More than 26,000 people became insolvent between April and June, according to the Insolvency Service. The figure brings the total this year to nearly 50,000. The number of insolvencies is expected to top 100,000 by January.

The Council of Mortgage Lenders reports that repossessions in the first half of the year were up by 76% to 8,140 - and further increases are expected.

Banks are keen to play down the repossession figures, and it's true the numbers are still relatively low. But they are an indication that ordinary families are beginning to struggle with debt.

Jump in insolvencies

The jump in the number of insolvencies is largely attributable to the rise in popularity of Individual Voluntary Arrangements (IVAs) - a sort of bankruptcy lite. The number of people entering into IVAs has rocketed by a record 153% to 11,105 in the second quarter of this year.

Cases of bankruptcy, on the other hand, dropped by 3.3% to 14,915 in the three months to June.

Mark Sands, director of insolvencies at KPMG, the consultancy, is not optimistic about the future. He says: "We are entering an era where personal insolvency is going to be an accepted part of everyday life. In the past few years there has been a complete change in people's attitude to credit."

We certainly seem happy to pile on the debt pounds. At the last count, we owe about £1,200 billion, or more than £1 trillion.

Banks must take their share of the blame for aggressive marketing and the supply of easy money. But we are also more comfortable than previous generations with the idea of borrowing rather than saving to fund our lifestyles. You want a new car? Sure, just take out a loan.

We also seem to be more relaxed about paying back our debts. The banks are bumping up their bad debt provision - and it's no wonder when insolvency seems an easy option for many people. But is it? Or are companies pushing us to go bust for their own interests?

How an IVA works

An IVA is a formal arrangement to pay off a portion of your debt over an agreed period - usually at least 25% over three to five years. You can only enter an IVA if you owe at least £15,000 to two or more lenders and the typical debt is £46,000. The interest on the debt is frozen and the debtor is declared debt-free at the end of the period.

An IVA must be set up by an authorised insolvency practitioner who will agree a schedule of payments with your creditors. The practitioner will also charge a fee. The fees vary widely but start at about £4,000. You might have to pay the fee upfront, although some firms will let you spread the cost over monthly instalments.

The number of IVAs could rise further still with plans to introduce the Simple IVA within the next 18 months. If you draw up an IVA, you must get agreement from the creditors who are owed at least 75% of the debt. A Simple IVA will mean you need agreement only from the lenders who are owed 50%.

Some experts fear that debt companies are pushing people into IVAs because they earn high fees. Paul Latham, finance director at Debt Free Direct, an insolvency advice group, says: "There are people in our industry who are not giving the best advice either for the debtor or the lender. Some advisers charge the debtor upfront to arrange an IVA, which is not refunded if no agreement is reached. That should be banned."

You should beware companies that promise to cut your debts by 75% or so. Such promises can be misleading because the creditors are unlikely to agree to such a chunky reduction in the amount you owe.

It is also quite common for an insolvency practitioner to put together unrealistic proposals - perhaps suggesting that the debtor makes monthly payments that he or she cannot afford. So the IVA fails. The client is then back to square one, but the firm still pockets its fee.

Debt advice

Consumer groups are worried that debt companies are pushing IVAs as an easy way to clear your debts. The Consumer Credit Counselling Service, for example, recommends IVAs only in about 3% of cases. Most people are advised to draw up an informal debt management plan to pay off the debt over time.

Beccy Boden Wilks of National Debtline says: "People considering an IVA should seek impartial advice, often available free, so they understand the implications and are aware of the alternatives. They should also check their insolvency practitioner is regulated - and ask about the fees."

An IVA does not carry the stigma of bankruptcy and is more flexible, because you do not have to hand over all your assets to a receiver. You can negotiate with your creditors so you might, for example, be able to save your home from repossession.

But you cannot walk away from your debts and it will certainly affect your credit rating. So you might find it difficult or expensive to get any kind of loan in the future.

When you are dealing with debt, there are no soft options.

Research at Dissolve Debt has shown that up to 1 million people are on the verge of declaring themselves bankrupt as they struggle to cope with thousands of pounds worth of debt.

Bankruptcy is an option that often has to be considered when an individual cannot pay their debts as they fall due. A first time bankrupt with debts will generally receive their discharge one year after the date of the bankruptcy order.

Bankruptcy is the most drastic method available for dealing with debts you cannot pay. It can however set you free from overwhelming debts so you can make a fresh start, and makes sure your assets are shared out fairly amongst your creditors. However there are many implications of bankruptcy. During your bankruptcy you will be subject to several restrictions, which can be avoided through an alternative to bankruptcy such as an IVA. Anyone can go bankrupt, and there are different insolvency procedures for dealing with companies and for individuals who become bankrupt.

Applying for an IVA is a regularly looked at as an avoidance from bankruptcy. The IVA enables you to cut your debts to an affordable level and clear them over a fixed period. The compromise should offer a larger repayment towards your debt than could otherwise be expected were you to be made bankrupt. You can even take out a fresh mortgage while in an IVA. What's more, it is a totally private arrangement - nobody needs to know about it apart from you, your advisors and your creditors. An IVA ensures that your home is protected and your job is not at risk and with Dissolve Debt an IVA can write off up to 75% of your debts.

There are so many advantages of an IVA. For example, there is not the stigma or the publicity that normally accompanies bankruptcy and the debtor can continue to trade in a business to generate money. It can give the peace of mind to have a fresh financial start.

The implications of bankruptcy are simple. Some of these disadvantages are: loosing control of your assets, not being able to act as a company director (if you wish to do so), being publicly examined in court and your credit being affected for many years after the annulment. It seems that as far as Dissolve Debt are concerned, the bankruptcy route could be very much avoided.

One in 8 of those with five-figure debts say they are 'quite likely' or 'very likely' to declare themselves bankrupt. Also, with an interest rate rise looking more and more definite, these figures are expected to grow. With the help of Dissolve Debt a growing number of people will be finding alternative ways to get themselves out of debt.

Filing for bankruptcy is an extreme move, not a quick fix. It's a long, painful process with a huge stigma, and you're unlikely to be able to get any kind of credit for ten years afterwards. Yet bankruptcies are on the rise. Out of ignorance or stupidity, more and more people seem to be using bankruptcy as a first option, instead of a last resort. Before you do it, make sure you've considered every alternative.

Have You Reorganized Your Debt?

If you haven't tried debt consolidation or negotiation, you really should. Yes, you'll have to pay back your debts eventually, but surely that's better than bankruptcy, isn't it?

Sell Everything You Can.

It's better to sell everything you own than it is to go into bankruptcy. Move to a smaller house. Sell your cars and take the bus. Take a good, hard look at your life, and realize that there are very few true 'basics': you can do without almost everything. Your house is probably full of quite valuable things that you never use, so bite the bullet and get rid of them. In short, subtract your debt payments from your income, and live like someone who earns that much.

You are going to lose almost everything you own if you declare bankruptcy, so you might as well try to sell it yourself at a better price and avoid the bankruptcy issue altogether.

Work More.

If you can get extra hours, do it. Being bankrupt is such an indignity that you should at least try going to your boss and asking for a pay rise or promotion. After all, the worst they can do is say no. They're going to find out about it anyway if you declare bankruptcy, and they might wonder why you didn't come and ask for their help. Also, if you're married and only one of you works, try to get the other a job - you never know, it might even be fun!

Use the Power of Threats.

One of the best things to do when you're considering bankruptcy is to write a letter to absolutely everyone you owe money to, letting them know. Make it a very clear threat: "if I cannot find a way of paying my debts then I will be forced to file for bankruptcy". Most creditors would rather let you pay back a tiny fraction of what you owe than have to try to get money out of a bankrupt.

Know Your Local Laws.

Bankruptcy laws vary enormously depending on where you are. There are some places where you'll be forced to give up everything you own to pay your creditors, some places where you at least get to keep your house, and some where you can declare yourself bankrupt and not even notice! Try to get a lawyer - you might think that you can't afford one, but many will work 'pro bono' (for free) for people who really need a lawyer but can't pay.

If you still cannot see the light at the end of the tunnel or if you are just looking for some advice on how to best remedy your situation you make want to seek out credit counseling.

Bankruptcy used to be seen as the absolute final straw if you were in financial difficulty. People would do everything in their power to avoid having to go down this route for many reasons - the fact it is a long, difficult and upsetting process for one and the social implications brought about by being declared bankrupt for two.

As credit is made available to more people in more ways and by more lenders, the amount of UK debt is increasing to a staggeringly frightening amount. For the less intelligent borrower, bankruptcy may be seen as the easy option. Your debt is written off without you needing to pay it. However, it does require you to surrender all of you assets which are distributed amongst all of the people you owe. Although it may not add up to the amount outstanding, and so financially you could see yourself as better off, it has real implications for your future.

Up to ten years after you have filed for bankruptcy you can be refused credit. Although you may feel as though you will never want credit again as it is what got you into trouble in the first place, you could change your opinion on this. Credit is required to buy a whole host of household items such as furniture and appliances, to buy a car or even to buy a home. You may be immediately prevented form doing any of these because of your bankruptcy history.

If you are considering filing for bankruptcy I strongly urge you to consider all of the other available options first. Many companies now advertise on television who offer loans against the value of your home and in some cases will lend you up to £100,000. This may give you the opportunity to consolidate some of your debt and reduce the amount of monthly payments you have to make. In addition to this it will provide a set interest rate, which is considerably lower than that of some credit and store cards, for all of the debt and so reducing the amount you have to pay.

According to the Student Loan Company, in an article published by the Daily Telegraph, thousands of young people are using bankruptcy as their route out of debt - despite the fact that the Student Loan itself cannot be included in a bankruptcy.

Fortunately, student loans can be included in an IVA - we've done several of these recently and had it confirmed today that the Student Loan Company is still looking favourably on reasonable IVAs.

However, the person we spoke to in the SLC's legal department also told us that this may not always be so. We inferred from his comments that this anomaly may be removed, perhaps in the near future.

We hope it isn't: Dissolve Debt believe that would be against the spirit of the new Simple Individual Voluntary Arrangement the government looks set to introduce between autumn 2006 and spring 2007. If you'd like to see what the Telegraph said click here.

The number of personal insolvencies has soared to record levels. There were 15,394 in the second quarter of 2005, marking an increase of 12% on the previous three months and a staggering 37% on the same period last year. The latest figures are due out on Friday – and nobody is expecting a decline.

Mike Gerrard, a personal insolvency specialist at Grant Thornton, says: “In the first six months of the year, there were about 30,000 personal insolvencies, an equivalent of more than 160 every day. I believe there is every likelihood of more than 60,000 before the end of the year, which would be double the number three years ago. To put it into context that's almost like filling Manchester United's ground at Old Trafford.”

The rise in bankruptcies coincides with a sharp increase in house repossessions. Court orders made to repossess properties were 66% higher over the past 12 months at 19,687 in the third quarter, the highest level since the first quarter of 1996.

David Stubbs, an economist at RICS, says: “The main reason behind the upturn in repossession activity is the rise in interest rates that began at the end of 2003 and continued to August of last year. These rises have increased mortgage interest payments by a substantial margin over the past year.”

But the Council of Mortgage Lenders (CML) is keen to snuff out any talk of a crisis. Sue Anderson of the CML says: “The figures show the number of orders for possession granted by the courts. However, these figures are much higher than the number of actual repossessions. For example, in the first half of this year there were 32,366 orders made, but only 4,640 actual repossessions.”

No wonder the CML is on the defensive, when some experts believe its members are at least partly to blame. Melanie Bien of Savills Private Finance, a mortgage broker, says: “Banks and building societies have traditionally based their mortgage calculations on your salary, so you were limited to four times a single income or two and a half times a joint income. But many have now switched to relatively woolly “affordability” calculations. Unfortunately, some people will borrow as much as a lender is willing to advance and this may have led them to take on more debt than they could afford.”

And it might be difficult to repay that debt if you plumped for a cheap two-year fix a couple of years ago. Philip Cartwright of broker London & Country Mortgages says: “Lots of people snapped up cheap fixed rates in 2003. When the deals expired earlier this year, the interest rates on some mortgages would have doubled.”

Mortgages are only part of the consumer debt story. If you include personal loans, credit and store cards we owe a grand total of about £1.1 trillion. We are, it seems, particularly fond of credit cards. UK consumers hold 66m credit cards – five times the European average.

Gerrard says: “Last year we were seeing people with loans, credit and store card debts in the region of £50,000. Now it's anything in the £50,000 to £100,000 bracket. It is clearly not surprising that individual bankruptcies are continuing to rise, nor that house repossessions are also becoming more commonplace after lying relatively dormant since the late 1980s and early 1990s. The problem rests squarely on excessive credit and store card use, personal loans, and often unsustainable champagne lifestyles.”

Can bankruptcy really help if you are a victim of the credit boom? A recent change in the law brought in the “quickie” bankruptcy: you must now be discharged of your status as a bankrupt after a maximum of 12 months. But bankruptcy is not an easy way out.

You file a petition for bankruptcy with the local county court and it costs about £400.

But you must then hand over all your assets to an official receiver or a licensed insolvency practitioner. You basically lose everything. The receiver sells your assets to clear the debts, plus interest, and cover any costs – and assets include your house. Say you owe £50,000 and your home is worth £250,000 with a mortgage of £150,000. The receiver could sell the property to release the £100,000 of equity to clear the debts and settle any professional fees. If the house is in joint names, the receiver would be entitled to only half the equity, but the sale could still be pushed through.

Your best hope is that your spouse or other family member would buy your share of the property. They would still have to hand the money over to the receiver, but at least you would be able to stay in the home.

If you are declared bankrupt, your bank account will also be frozen and you might be forced to pay a regular amount each month from your income.

Mark Allen of Grant Thornton says: “Bankruptcy is not a soft option. Your debts might be written off, but you lose all your assets. I would really only recommend it to people who are overwhelmed by debt, but have no assets or income.”

The quickie bankruptcy does not really make it any easier, either. You might not carry the bankrupt's label after 12 months, but chances are you will still bear the scars. Credit reference agencies, for example, will keep a note of your bankruptcy on their records for up to six years. So you might still find it hard to arrange a mortgage, take out a loan or even open a current account.

The most common alternative to bankruptcy is to agree some sort of payment schedule with your creditors. It can be informal, or you can agree an Individual Voluntary Arrangement (IVA) through an insolvency practitioner. The advantage of an IVA over bankruptcy is that you do not have to surrender all your assets to a receiver, or bear the stigma of a bankrupt. The debt is also frozen.

You might, for example, have debts of £50,000 and agree to pay £25,000 up front, perhaps by withdrawing equity from your home. You might then arrange to pay £200 a month over the next five years in full and final settlement, so you would eventually repay a total of £37,000. Allen says: “You don't have to clear your debts in full, but you have to prove you are willing to meet your creditors at least part way. If you are under threat of house repossession, an IVA can also be a good way to safeguard your home.”