Record number of personal insolvencies predicted for 2008



A record 130,000 people are likely to enter into an Individual Voluntary Arrangement (IVA) or be declared bankrupt in 2008 according to data analysed by professional services firm KPMG.

In 2007 creditors had to write off at least £1.3 billion (2006: £1.4 billion) in bad debts as a result of the number of people who had entered into IVAs over the last year. The research also shows the average IVA debtor owed £50,300 (2006: £52,000) and proposed to repay only 38% (equivalent to £19,100 per debtor) of this sum.

“The modern IVA deals with personal loans, credit card balances and other forms of ‘buy now, pay later’ unsecured debts," said Mark Sands, Director of Personal Insolvency at KPMG. "Most of the money is borrowed to meet “current” expenditure including lifestyle items such as holidays rather than to acquire assets or to fund a business.

“By the time people realise the extent of their problems, their total debts will have been swelled by interest, charges and even further borrowing to fund the minimum repayments.

" In 2007 the average IVA debtor owed £50,300. However, this hides a wide spread of debt levels ranging from around £20,000 to more than £100,000 – KPMG estimates that more than 2,500 people entered into IVAs with debts exceeding £100,000 this year.

“This high average level of debt clearly indicates that too many people have borrowings that they have no realistic hope of repaying. Any excessive spending over Christmas and at the New Year sales, especially where goods are paid for on credit, risks tipping even more consumers over the edge. The credit crunch is resulting in increased rejections of credit card applications and a reduction in the availability of loans secured by a second charge on the family home. Those in difficulty will find that their options are becoming limited – formal insolvency will for many be the only way out.

“The IVA is an increasingly popular way for many people in financial difficulty as it offers them an opportunity to draw a line in the sand and restructure their finances. Based on our data, we estimate that around 43,000 people used the IVA procedure to write off a portion of their debts in 2007. We estimate that around 67,000 people were declared bankrupt in 2007, taking total personal insolvencies to around 110,000 – more than ever before.

“Lending institutions have over the past year raised concerns as to the potential misuse of IVAs, where perhaps they are being recommended when they are not the most appropriate solution. Our research shows that 17% (one in six) of people had their IVA turned down by creditors; which is up from 15% in 2006. Several steps have been taken to address these concerns, resulting in the agreement of a Protocol for IVAs. It remains essential that all involved continue open dialogue about the wide variety of solutions which are available to the increasing number of consumers struggling to manage their debts.”



January 4th 2008