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Record number of insolvencies for 2008

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.

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