Carried away on a torrent of bad debts

Getting a loan to pay for the car, another credit card to cover the holiday or overstretching yourself on the mortgage is easier than ever. But as we borrow more, the number of personal insolvencies and bankruptcies is also growing.

In the second quarter of this year there were 7,903 individual insolvencies. According to the Department of Trade and Industry, this represented a rise of 13.1 per cent on the previous quarter and 3.9 per cent on the same period a year ago.

"At first glance, this rise is surprising as the economy is doing relatively well. But it is so easy to get into debt that the increase in insolvencies isn't that shocking," says Peter Sargent, insolvency practitioner at Sargent & Co and the Yorkshire regional chairman for R3, the Association of Business Recovery Professionals. "Often, people are hit by problems such as the loss of their job or the break-up of a relationship, so a debt that was once manageable isn't any more."

Most individual insolvents are declared bankrupt after defaulting on loan or mortgage repayments. But there has also been a sharp rise in the number of people entering into Individual Voluntary Arrangements (IVAs), where debtors agree with their creditors how much they will repay over a certain period. This was the case for 1,631 individuals in the second quarter, a rise of 16.8 per cent on the first quarter.

But these arrangements don't suit everybody. "IVAs are much more onerous [than bankruptcy] because the debtor makes an agreement they have to keep to," says Mr Sargent. "This is a commitment over time, so it's likely to be hard work sticking to it. If you fail to comply, you get made bankrupt anyway."

Insolvency practitioners believe it is too easy to take on huge debts. "People are stretching themselves more and more," says Mr Sargent. "I had a father come to me in debt: he owed £100,000 on credit cards, while his son owed £150,000. It's a disgrace peo- ple are able to borrow so much."

While it could be argued that it is down to the Government to ensure lenders are more responsible and don't allow people to borrow beyond their means, Gill Hankey at the Bankruptcy Advisory Service (BAS) believes it is not in its interests to do so.

"Creditors are buoying up the economy at the moment," she says. "Lenders are already well qualified enough to decide who they should be lending money to – they are far more knowledgeable than borrowers about how much [it is affordable] to borrow."

While stigma is still attached to bankruptcy – Mr Sargent likens it to "getting divorced 35 years ago" – the shame is lessening as more and more people become insolvent. But it is no soft option.

"Anyone involved in an insolvency would say it's one of the most stressful experiences you can go through," says Ms Hankey. "You don't do it by choice. I don't think I have half a dozen clients out of tens of thousands who is one of those people who casually runs up thousands of pounds' worth of debts on credit cards, declares themselves bankrupt and then does the same thing again."

It is hard to generalise on the best course of action if you are in severe debt, but the first step is to seek help. It is much easier to deal with several thousand pounds' worth of debt than hundreds of thousands.

First, contact your creditors. Explain that you are having trouble with the repayments and ask them to agree to a restructured plan. If this isn't possible, or you can't face contacting the creditors yourself, a debt advisory service like the BAS or the Credit Counselling Service should be your next port of call.

Avoid debt management companies, which merely restructure your debt into one repayment. This will end up costing you more in the long run.

Ms Hankey often recommends remortgaging if clients have some equity in their home, as this will be cheaper than the interest charged on other borrowings.

But Charles Turner, director at accountants Pricewaterhouse-Coopers, sounds a note of caution here. "Inflated house prices mean more people appear to be remortgaging in order to consolidate their debts. And, as long as the property market doesn't crash, they may see it as a way to avoid bankruptcy," he says.

"But great care must be taken when reorganising personal debt, which can quickly become unaffordable if interest rates eventually increase. It can be a devastating mistake to, in effect, gamble with your home."

Contacts: BAS, 01482 633035; Credit Counselling Service, 0800 138 3328 (open Monday to Friday, 8am to 8pm).