Individual insolvencies set to rocket

There were 26,596 individual insolvencies in the second quarter of 2007 – 10,698 IVAs and 16,258 bankruptcies. Yet with interest rates at a six year high of 5.75% and the cost of living soaring, research by online price comparison and switching service uSwitch.com reveals that individual insolvencies could reach an all time high of 112,588 by the end of the year.

The average household debt in Britain is currently increasing by £13 a day, with the average amount of debt per household standing at £8,841 or £55,567, including mortgages. People are increasingly struggling to make ends meet in a climate of soaring debt levels and rising interest rates and borrowers remain under increasing pressure following the Bank of England’s decision to increase the base rate three times this year and five times since last August. The 0.75 per cent rise since January this year, has added an estimated £677 per year to the average mortgage repayment and the cost of running the average home is increasing at an average of £30 a day.

IVA firms cut the amount a debtor has to be repaid to a more manageable level – typically 75% of a person’s debt is written off. However, consumers need to be aware that like bankruptcy, an IVA can have serious consequences on their ability to get credit in future.

Mike Naylor, personal finance expert at online price comparison and switching service uSwitch.com, says: “It is worrying that so many people are resorting to individual insolvencies, be it an IVA or bankruptcy, to resolve their personal debt problems. Consumers have a high propensity to borrow these days and there is a real risk that we will see many more people in serious financial difficulty if there are further increases to the base rate before end of the year or if we experience a sudden change to our existing economic climate.

“The reality of today’s society is that the cost of running a home means that almost half (44%) of the nation’s households require more than one breadwinner to maintain an acceptable standard of living. This reliance on two incomes to buy and run the family home means millions of households are effectively doubling the risk of financial hardship should one of the breadwinners become unable to work.

“The rise in individual insolvencies will also have an impact on consumers who are not in financial difficulties. We have seen banks and credit card companies alike persistently increasing their bad debt provisions over the past few years. The one constant factor remains the recovery of these losses from other customers through the increase of interest rates, charges and fees.

“Both banks and credit companies need to do more to lend responsibly, and of course consumers need to borrow sensibly and take responsibility for managing their own finances.”

Mike Naylor continues: “If people find themselves in financial difficulty the worst thing they can do is do nothing. Banks have a duty to help people in financial hardship and there is a free debt advice is readily available, form respectable organizations such as the Consumer Credit Counselling Service, National Debtline and Citizen’s Advice. An IVA or bankruptcy should be the option of last resort for anyone with financial problems as they have a very serious impact on people’s credit histories and their ability to borrow in the future. In the case of bankruptcy, it could also impact on their employment prospects.”

uSwitch.com’s debt advice centre can give consumers a helping hand on budget management, how to best prioritise financial commitments and guidance as to the options best suited to their situation.