Record personal insolvencies expected in 2008

by Gill Montia

Story link: Record personal insolvencies expected in 2008

KPGM has published a report in which it forecasts that a record number of people will be declared insolvent in 2008.

The accountancy firm expects high levels of debt and the impact of the credit squeeze to take their toll on personal finances with the result that in 2008, over 130,000 people could be declared bankrupt or enter into an individual voluntary arrangement (IVA) with their creditors. The figure compares with 109,615 in 2007.

Borrowers with IVAs can restructure their debts into monthly payments that are made over a fixed period of time, after which the balance of the debt is written off.

During 2007, the average amount owed by a debtor entering into an IVA stood at £50,300, although in some cases debts have exceeded £100,000.

According to KPMG’s data, the average proposed repayment amounted to 38% of debts (or £19,100 for the average debtor), leaving a total of £1.3 billion to be written off by creditors.

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

He goes on to warn that the credit squeeze is now limiting the options for many debtors and that “formal insolvency will for many be the only way out”.

Personal insolvencies have more than doubled since 2004, when they totalled 46,650.

This is partly due to lenders resisting the growth in the number of IVAs, which were originally intended more for small business owners than for individual consumers but have been heavily promoted by debt management companies in recent years.

In 2007, 17% those applying for an IVA were unsuccessful, compared with 15% in 2006.

However, in February, a new industry code of practice will oblige a lender who rejects an IVA to give a specific reason for doing so.