Personal insolvency set to be the highest since records began

Despite signs of economic recovery, the number of individuals who are facing personal financial disaster is set to continue.

Official figures showing the number of people who were declared officially insolvent in the first quarter of 2010 are due to be released on Wed 5th May.

It has been suggested by insolvency firm RSM Tenon that the number will be above 35,500, passing the record number reported in the final three months of 2009.

If right, this will come as no surprise. Over the past 15 years, easy access to credit has pushed the total level of personal debt to c£1.5 trillion and left many hundreds of thousands of people owing sums many times greater than their annual salary.

Personal problems lag behind the economy

The problem facing many is that they have pushed themselves to the very limit of their financial capability with very little savings to fall back on if circumstances change.

And many circumstances have changed over the past two years of economic recession.

It is true that redundancies have been far less than some predicted. However, this has been achieved by reducing working hours and cutting salaries. As such, the reality for many people is that their finances are in a poor state and they are facing debts that they just cannot afford.

In these circumstances people do not declare themselves insolvent immediately. They tend to try and hang on, propping up their lost income through additional borrowing, particularly by using credit cards and bank overdrafts.

However, if things do not change for the better, lines of credit eventually run out and the individual is faced with a mountain of debt that they cannot repay.

This is why a sharp increase in personal insolvencies often lags a significant way behind an economic downturn.

How big is the real problem?

One argument behind closed doors could well be that although personal insolvency is unfortunate, in the context of the total working population c140,000 instances per year as a very small minority.

I suggest that we hold this view at our peril. The problem is that the statistics only show the numbers of people formal declared insolvent.

Based on the experience of Beat My Debt and other debt management organisations, the numbers of people who are unofficially insolvent and managing their debts with informal debt management plans is likely to be at least double and perhaps even triple the official figures.

The banking industry clearly believes this to be the case and is worried.

When pressed about why interest rates on credit cards and personal loans are the highest in 10 years compared to the record lows of the Bank of England rate, banks argue that they are being forced to offset the huge risk of defaults that they are currently facing.

The problem of personal insolvency in the UK is very real and is set to get worse before it gets better.

Even as the economy continues to improve, it is likely to be a long time yet before businesses feel confident enough to increase working hours, wages and the numbers they employ.

This eventual up turn will come too late for many who are unable to sustain their debt now.

If you are struggling with debt, visit www.BeatMyDebt.com

Our vibrant forum gives free access to industry experts and others who have suffered with debt problems.

Useful guides, calculators and information are also available designed to help you understand how to manage and resolve debt problems.

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