Personal insolvency to reach record levels

THE number of people becoming insolvent will reach record highs next year, according to a new report, but the level of personal debt is falling.

Accountants KPMG predict that more than 150,000 people will enter into an Individual Voluntary Arrangement (IVA), be declared bankrupt or enter into a Debt Relief Order which will be introduced in April.

In 2008, the research found that creditors had to write off at least £1.1bn in bad debts, £200m less than in 2007, as a result of the number of people who had entered into IVAs over the past year. The research also shows the average IVA debtor owed £47,800, compared £50,300 in 2007.

Mark Sands, director of personal insolvency at KPMG, said: “Most IVAs deal with personal loans, credit card balances and other forms of unsecured debts. Most of this money was borrowed to meet ‘current’ expenditure including lifestyle items such as holidays, or to meet monthly shortfalls in the household budget, rather than to acquire assets or to fund a business.

“By the time people realise the extent of their problems, their total debts will have been swelled by interest, charges and even further borrowing to fund the minimum repayments. 

In April 2009, the government plans to introduce debt relief orders (‘DROs’), which will allow consumers with debts of less than £15,000, and minimal assets or surplus income, to write off their debts without entering into a full blown bankruptcy.

Mr Sands added: “We expect this new approach to increase the number of people using personal insolvency as the way to deal with their debts.  DROs, together with the expected increase in unemployment, are likely to lead to record levels of personal insolvency of more than 150,000.”