Last updated 10:09, Tuesday, 27 May 2008

Insolvency figures look set to hit a new high in 2008 after rising for the first time in more than a year during the first quarter. A total of 25,264 people in England and Wales were declared insolvent during the period, a rise of 1.7 per cent compared with the previous three months, the Insolvency Service said.

Bust: A total of 25,264 people in England and Wales were declared insolvent in the first quarter of 2008

Experts warned that the figure is likely to continue rising during the year to reach a record high, as already overstretched consumers buckle under the pressure caused by the credit crunch.

Today’s rise ends a run of four consecutive quarters in which the number of people going insolvent has fallen.

But while the numbers are rising again, they are still 13.2 per cent lower than they were during the first quarter of 2007 and the second lowest figure since the start of 2006.

The number of companies running into problems is also on the increase, with administration figures shooting up by 54 per cent during the first three months of the year.

A total of 858 companies went into administration during the period, up from 557 in the final part of last year.

KPMG is predicting that a total of 130,000 people will have been declared insolvent by the end of 2008, well up on 2007’s level of 106,645.

Mark Sands, director of personal insolvency at KPMG, said: “Even with base rates starting to fall, consumers are seeing the cost of their mortgages increase, fuel costs continue to go up and now food prices are rising in a manner not seen for years.

“More than one million homeowners face the end of cheap fixed-rate deals this year, mortgage deals are increasingly difficult to secure and unsecured lending has tighter restrictions than for many years as a result of the credit crunch.”

Capital Economics has pencilled in 115,000 insolvencies for 2008, possibly rising to more than 130,000 in 2009.

It said today’s figures were likely to be “just the tip of the iceberg”.

Liz Bingham, head of corporate restructuring at Ernst & Young, said: “Insolvencies are set to increase at a much faster pace in the later part of 2008 and in 2009.

“The driving force behind the increases will be the tighter credit conditions, highlighted in Bank of England surveys and palpable to those who have tried to refinance a loan or arrange mortgage in 2008.

“The full impact of this tightening is just feeding through as credit providers deliver sharp doses of reality to credit-addled individuals and businesses who are just finding out that they can’t live in ‘never-never’ land forever.”

A total of 15,651 people in England and Wales went bankrupt during the three months, broadly in line with the final quarter of the year and 6.8 per cent below the level for the corresponding three months of 2007.

A further 9,614 people from the total, which is seasonally adjusted and rounded down, took out an Individual Voluntary Arrangement (IVA), under which interest on debt is frozen in exchange for a set amount being repaid each month.

The figure was a jump of 4.3 per cent compared with the end of 2007, but was still 22 per cent lower than in the first quarter of last year.

IVA numbers were depressed during 2007 due to a long-running dispute between creditors and IVA providers over whether the agreements were always appropriate for consumers.

But their numbers are expected to rise strongly again this year after a new protocol was introduced in February.

Charles Turner, director in the business recovery services practice at PricewaterhouseCoopers, warned that personal insolvency figures were becoming too high to be sustainable over the long-term for the UK economy.

He said: “During the last major downturn in the early 1990s bankruptcy and IVA figures peaked at an annual total of 36,000, while we are now seeing them level out at over 100,000 a year – a number which is likely to grow in current economic conditions.”

He added that unsecured borrowing has increased by a further £4.6 billion during the first quarter, suggesting that consumers were continuing to borrow to fund lifestyles they could not afford, rather than cut back.

Meanwhile insolvency trade body R3 warned that the official statistics hid the true extent of the UK’s debt problems.

It said the Insolvency Service data did not include people who had taken out Debt Management Plans (DMP), which, it claims, exceeds the number of people who went bankrupt or took out an IVA.

Nick O’Reilly, president of R3, said: “The true number of individuals unable to pay their debts in the UK could be three times higher than the Insolvency Service’s figures due to those in Debt Management Plans not being counted.”