As a neat illustration of the Law of Unintended Consequence, the 2004 Enterprise Act (and the equivalent changes soon to take effect in Scotland) take some beating. These regulations were designed to help entrepreneurs to recover more quickly from the trauma of bankruptcy - bankrupt businessmen could find themselves discharged after just one year, down from three previously.
The aim of the legislation was to help boost 'enterprise Britain'. We've certainly got a boost - in bankruptcy. It is one being enjoyed by thousands of debt-laden households - and probably tens of thousands more before the year is out. A toxic combination of over-borrowed households, huge increases in bank bad debts, soaring energy bills and now a rise in interest rates threatens an explosion in personal bankruptcies to beat all previous records.
The legislative changes have done little to boost enterprise in the manner intended. But by taking the sting out of bankruptcy, they are set to become an everyday, iconic feature of life in over-borrowed Britain: not so much the Debtor's Prison, more the Debtor's Great Escape.
According to figures released last Friday, the number of people declared insolvent in the second quarter of the year in England and Wales rocketed by two-thirds to 26,000 and the total is on course to smash through the 100,000 barrier for the year as a whole - almost a threefold increase on 2003.
The rise has been fuelled by an explosion in Individual Voluntary Arrangements : an alternative to bankruptcy that let debtors come to an agreement with creditors. These rose 35% on the first quarter to 11,105, and by more than 150% on the same period a year ago.
In Scotland bankruptcies are already at record levels. In the wake of the personal borrowing boom of recent years, the number of Scots declared bankrupt in the year to end June is up 34% to 5,296. Matt Henderson, business recovery and insolvency partner at Johnston Carmichael, says: "To put this into context, the average quarterly figures were only around 800 to 850 per quarter for the whole of 2003 and 2004."
He forecasts that around 5,500 Scots will be declared bankrupt this year and 10,000 will enter a Protected Trust Deed - a process that helps individuals with severe debt problems. "To have 16,000 Scots a year going through formal insolvency processes is an alarming statistic. Banks, credit card companies and other commercial lenders will, no doubt, on seeing the increase in personal insolvency statistics, have concern about the recoverability of their unsecured lending to individuals."
You do not have to look far for the principal cause of this explosion: the surge in individual and household debt in recent years as interest rates fell to generational lows. The result of bank excessive lending and public gullibility has been to push the personal debt mountain in Britain to an all-time record £1.2 trillion.
But even this statistic barely captures the debt mania that has kept the UK economy cooking under a Chancellor farcically famed for 'prudence'. Mortgage lending including equity withdrawal - the capturing of house price rises by taking out 'top-up' loans - soared. And house prices kept climbing too, doubling in the past five years and fuelling the borrowing circus.
With the mortgage boom came a massive leap in unsecured lending and credit card debt. It seemed as if banks, awash with money, could not lend quickly enough to new mortgage borrowers who needed to borrow more to buy furniture and fittings for their new homes. Banks, their branches transformed from discreet, darkly furnished interiors into Wendy burger bars with pastel-coloured playschool furniture, couldn't lend quickly enough to the new cohorts of school leavers and those barely into their first job. As for 'risk assessment', the more that was run up on credit cards, the higher went the borrowing limit.
Doubts have also been expressed about the emergence of interest-only mortgages: Last year some 200,000 house buyers took out an interest-only mortgage with no arrangement for repaying the debt - and almost 61,000 were first-time buyers.
The result has been a surge in bankruptcies and mortgage repossessions: 21.4% up on a year ago at 22,254 in the second quarter. And now has come the predictable, if still shocking, rise in bank bad and doubtful debt provisions to an aggregate total of more than £3 billion.
Barclays alone reported a 50% rise in bad debt provisions to £1bn. Michael Geoghegan, the new chief executive of HSBC (bad debts up 36% to £361 million), blamed the aggressive marketing of personal bankruptcies and insolvency agreements to debt-stretched consumers for the bad debt explosion - akin to a pyromaniac blaming safety matches for the intensity of fires.
Britain's debt explosion has been rationalised on two counts: first, that the incidence of sour lending has, until recently, been low; and second, that there has been a greater good in a steadily growing UK economy. House prices, consumer spending and higher public spending have kept the economy ticking along nicely while exports weakened and investment failed to take off. Indeed, it has been the continued strength of domestic demand after a poor start to the year that caused the Bank of England's Monetary Policy Committee to raise interest rates to 4.75% last week.
This sanguine view of an economy largely immune from the debt that has fuelled it will now be put to the test. Views are predictably split as to the effect we can expect this autumn from higher energy bills, higher interest rates, rising unemployment - and the injection of some judgment into the process of bank lending. Tellingly, about half of all loan applications to Barclaycard are now being rejected, and at some other lending institutions the rejection rate has climbed to two-thirds.
Distress there will be. David Harker, chief executive of Citizens Advice, has warned that it could take 77 years on average for people asking Citizens Advice Bureaux for help with debt to get back into the black.
A relatively small increase in mortgage interest payments - £24 a month on a £150,000 loan - will not on its own make much difference. But it is set to coincide with 28% rise in household energy bills and hikes in the cost of other utilities. If average pay deals stay subdued, then discretionary disposal income will take the hit.
The issue will turn on how many households are suffering debt distress. While the insolvency figures do not look good, the problem is concentrated in a small proportion of low-income households. Lombard Street Research agrees: "For the vast majority of households in employment, with steady disposable income growth, there is no problem in meeting debt servicing costs… There is little prospect of general distress in the household sector."
However, this benign outcome depends on two factors: that the housing market stays sufficiently buoyant to absorb debt-related selling triggered by banks calling in loans, and that last week's rate rise is a one-off. If the MPC chases rates up to 5% and beyond, the UK economy, with its £1.2 trillion of household debt, would be facing something altogether more painful. As it is, there is one economic sub-sector that will continue to boom: insolvency orders.
