INTEREST rate rises, growing consumer debt and tightening lending practices will cause a major escalation in personal insolvency next year, the Cardiff office of PKF warns.

Last week the number of people declared insolvent fell by 5% in the three months to the end of September – the first year-on-year drop in five years.

However, PKF partner Keith Morgan believes that in 2008 insolvency numbers are likely to rise again.

He said, “We have been helping an increasing number of people who have been using their credit cards to pay their mortgages, which is a mark of extreme desperation given the speed with which the level of debt mounts up.

“It’s an unsustainable practice and a sign that many are standing on the precipice and only relatively small additional costs will push them over the edge.

“Personal insolvencies in England and Wales peaked at just under 30,000 in the last quarter of 2006 and the first quarter of 2007, but the likelihood is that the ceiling will be breached in the first quarter of next year.

“I anticipate the numbers will continue to rise steadily throughout the year.

“It will not be much of a comfort to those facing this position, but a hard dose of reality in the personal credit market is long overdue.

“It’s deplorable that it’s taken a meltdown in the US sub-prime mortgage market for lenders to review their loans and credit policies but it is essential that it happens. It’s going to mean short-term pain but unrealistic lending practices had to stop at some point; hopefully this is it.”

The partner with the accountancy and business advisory firm said that the tightening of lending criteria would cause the insolvency figures to rise significantly as those in the worst financial positions weren’t be able to carry on.

He added, “It’s a very hard lesson for the UK to learn but it’s essential that it is taken on board. Everyone has to understand that there is a cost for credit.

“We have to help the thousands of people in debt and part of that is removing the stigma of bankruptcy for the current generation. There is life after bankruptcy and people have to view it as the start of rebuilding their lives.

“That’s a very difficult message to take on board for someone who might have lost their home but it’s the reality created by over a decade of spending on credit.”

Rob Lewis, partner in the business Recovery Services practice at PricewaterhouseCoopers, said, “The recent rise in credit card debt suggests that further increases could be round the corner.

“Rises in credit card debt and repossessions are both worrying signs that consumers are feeling the pinch and turning to unsecured borrowing as a means to make ends meet.

“With the problems in the sub-prime market, consumers may find it harder to borrow their way out of trouble leading to another wave of insolvencies over the coming months.”

He added, “Credit has been readily available to corporates until this summer and the downward trend in corporate insolvencies reflects this.

“However, while companies have so far avoided formal insolvency, less credit-worthy corporates are finding that it is increasingly difficult to borrow at affordable rates in the current climate.

“There is still uncertainty as to how many businesses will fail as a result of the more restrictive credit environment.”


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