Personal insolvencies hit an all time high

Personal insolvencies hit an all time high in 2005, with 67,580 people going bankrupt or entering into an Individual Voluntary Agreement (IVA) in England and Wales - a 45% increase on 2004.

According to statistics released by the DTI on Friday, the record numbers followed a massive surge in personal insolvencies in the last quarter of 2005, with IVAs more than doubling.

"This new increase in personal insolvency levels remains based on excessive consumer spending but is jaw dropping nonetheless", said Mike Gerrard, a personal insolvency expert at Grant Thornton.

"While someone on a yearly wage of 20k might borrow twice their salary before having to seek a bankruptcy or an IVA, someone on 40k per year will often have unsecured debts in the region of £100,000 to £150,000", he says.

Pricewaterhouse Coopers says that the number of IVAs in the final quarter of 2005 showed a staggering 117% increase compared to the same quarter in 2004. "This shows the continuing popularity of the IVA process with debtors as a way to resolve their financial problems," says the firm, which conducted independent research into IVAs in England and Wales during July to November in 2005.

This found that in most cases, people became insolvent simply because they had spent too much money. "Eighty-three percent of debtors cited expenditure in excess of income as the cause of their financial problems, challenging conventional wisdom that significant life events, such as redundancy, are the main cause of insolvency," says PwC. The firm’s research also showed that insolvency is becoming increasingly prevalent among the young, with people in their 20s and 30s showing the biggest rise in the last two years.

While personal insolvencies spiral, business failures are also increasing, though at a much slower rate. Some 16,348 companies became insolvent in England and Wales during 2005 - an increase of around 7.2% on 2004, according to PwC. The retail sector was particularly hard hit, although the number of retail insolvencies tailed off towards the end of the year. Deloitte estimates that retail liquidations were down by 2.3% in the final quarter of 2005, compared to Q3.

However, worse times could be ahead for retailers, says Neville Kahn, Reorganisation Services Partner at Deloitte. "For those retailers who have seen a downturn in trading, the next eight weeks will be critical with the key point being the March lease payment date," he said. "Failure to meet leasing obligations is the number one factor that pushes retailers over the edge into insolvency. That being the case, we expect there to be an increase in retail insolvencies in April."

Taken from Business Zone 7th February 2006

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