The number of personal insolvencies hit a new record high in the first three months of this year, rising to 23,351 from 20,679 in the fourth quarter of 2005. That's up 73% on a year ago. The number of bankruptcies is now more than double its last peak, in the early 1990s.
But some point out that the increase in insolvency is being driven primarily by people seeking to go bankrupt, rather than by lenders taking people to court. That's partly because rule changes in 2004 made it far easier for people to write off their debts.
So is the surge in bankruptcies set to level off - or is this one trend that shows no sign of ending any time soon?
More people than ever are going bankrupt - and it's not just because more of us have access to credit than ever before. The number of bankrupts per £1bn (inflation adjusted) of unsecured debt has now passed its previous peak in the early 1990s, according to Vicky Redwood at Capital Economics.
But could this be because bankruptcy is not only easier, but is also being actively promoted as a way to escape debts in a relatively pain-free manner? The number of Individual Voluntary Agreements - where a debtor promises to repay all or part of their debts over an agreed period, in exchange for the rest being written off - has trebled in the past year. Listed insolvency practitioners like Debt Free Direct and Debtmatters have seen their share prices soar on the back of this bankruptcy boom.
It's comforting for some to imagine that the surge in insolvency is more to do with rule changes than the fact that the UK is now carrying around £1.2 trillion of debt.
But there is still a problem with this explanation. Even if people are using bankruptcy as an 'easy' way to escape their debts, that money doesn't just vanish. Someone has to pay - and that someone is usually the creditors.
But creditors are wising up. The amount of unsecured credit taken out by consumers is falling - consumer credit rose by just £281m in March, its lowest level since February 1994.
But that's not because consumers are getting more careful with their money - it's because lenders are making it tougher to get unsecured loans. A recent reports from market analysts Datamonitor on concluded that: 'As a result of increased indebtedness and lenders adopting a more precautionary approach to lending, consumers with a less-than-good credit history may find it more difficult to get access to cheap credit.
Of course, there's still another way for consumers to get their hands on extra debt. Consumer credit growth has slowed, but remortgaging remains strong. Lenders are making it more difficult to get unsecured lending, but they're falling over themselves to offer people secured lending - that is, money secured against the value of their homes.
That might seem like a contradiction, but of course it's not. Unsecured lenders don't have much hope of seeing their money returned if a customer goes bankrupt. But a secured lender gets a nice new house to sell to the highest bidder.
And there's evidence that this is happening. The number of court actions brought against homeowners by mortgage lenders went up by 8% in the three months to March. That figure was up by almost a third compared to the same time last year, and is now at its highest level since 1993.
- MoneyWeek
