Personal insolvencies hit a record high today, according to official figures from the Insolvency Service.
The service reported a staggering 33,073 individual insolvencies in England and Wales for the second quarter of 2009 - up from 29,774 in the previous quarter, and an increase of 27.4% on the same period last year.
This was made up of 18,870 bankruptcies; 12,225 individual voluntary arrangements (IVAs) and 1,978 debt relief orders (DROs).
Mike Gerrard, a personal insolvency partner at Grant Thornton, says: "The level of unemployment undoubtedly has an effect on the insolvency statistics but we haven't seen the full impact yet. The inability to re-mortgage is now a big issue and one that will last after the recession is over.
"It's clear that the level of personal insolvencies will continue to rise even when the economy begins to pick up and there is going to be a definite recession hangover effect that will last for some time.
"The rise in negative equity and lenders employing stricter lending criteria has hit people who would previously have been able to borrow their way out of immediate trouble."
The figures follow the latest statistics from Credit Action that put the average personal debt, including mortgages, owed by UK adults at £30,460 - equivalent to 133% of average earnings.
Average consumer borrowing through credit cards, car finance deals, store cards, overdrafts and unsecured personal loans has risen to £4,825.
If you’re feeling the pressure from creditors and struggling to meet repayments on your debts, don’t suffer in silence. Seek help from a debt charity and look into the three main debt solutions:
Debt relief order
The DRO is a new individual insolvency procedure which came into force on 6 April 2009 to provide an alternative route into personal insolvency for certain categories of people. It is suitable for people who do not own their own home, have little surplus income and assets and less than £15,000 of debt.
You can apply for a DRO through an intermediary at a debt charity or advice service, and if accepted the order lasts for 12 months. During this time creditors named on the order cannot take any action to recover their money without permission from the court. At the end of the period, if your circumstances have not changed, you will be freed from the debts that were included in your order. It costs £90 to apply and does not involve the courts.
Like IVAs and bankruptcy (see below), DROs remain on your credit history for up to six years and will impact on your ability to gain credit in the future.
Individual Voluntary Arrangement
An IVA is basically a contract between you and your creditors. With the assistance of an insolvency practicioner, you will put forward a proposal to your creditors, outlining your current financial position, with an offer of the most you can afford to pay.
Contributions are normally paid monthly and typically last between three to five years. You can also make a one-off lump sum payment. On completion of your part of the contract, the creditors have no recourse over the debt and it is deemed to be legally discharged.
More flexible than bankruptcy, IVAs give you more control over your assets and payments to creditors. However, there is no guarantee that the creditors will agree to your proposal and failure to comply with the terms of the IVA may result in eventual bankruptcy.
Fees tend to vary between £1,250 - £4,000 plus vat and will be based upon the number of creditors and the complexity of the case.
You or your creditors can apply for a court order to be declared bankrupt if you have unmanageable debt. It costs a minimum £510 - more if solicitors are involved - and entails declaring every detail of your finances and an immediate freeze on your accounts and credit cards.
You will be required to give up any assets, including interest in your home, and will likely involve the closure of any business you run. The bankruptcy order will be made public and your assets will be distributed among your creditors.
You will be automatically discharged from bankruptcy after a maximum of 12 months providing you carry out the duties required under the order. While bankruptcy frees you from overwhelming debts, it is subject to a number of obligations and restrictions.
Bankruptcy is the most restrictive route to personal insolvency and should only be considered with professional advice when other options have been ruled out.