There's a myth that the huge growth in personal bankruptcies over recent years is all about our spendthrift, have-it-all culture. The argument goes that the numbers published today for 2007, which almost match the record figure for 2006 of 106,000, are chiefly made up of men and women who bought too many shoes, swapped their old TV for an LCD flat-screen and ordered a new kitchen when they were bored of the last one.

Yet most people are forced into bankruptcy by a finance industry that bamboozles them with complex loans that are riddled with tripwire clauses. It is these clauses that generally push people over the edge.

Most people in a suburban semi will struggle to spend more than £10,000 on a new kitchen or conservatory. As for shoes, while there are studies that show some of the rise in insolvencies is due to people blowing thousands of pounds on high living, it is difficult to spend more than £10,000 on a credit card without noticing.

The chief problem comes when the 0% teaser rate on the credit card runs out and a 17.5% rate kicks in. The bank tells the borrower not to worry and persuades them to switch their debt into a personal loan; then they are locked in. If their income varies at all over the next three or five years and they miss a payment, they will start to be whacked by fees and charges. If they have succumbed to an advert on daytime TV or the back pages of a red top newspaper, the fees and charges are levied from the outset. If the borrower opts for another credit card, it is usually to pay off the old debt rather than just keep spending.

For most people who end up in the bankruptcy courts, a standard £10,000 loan is the starting point for unmanageable debts of £50,000 and more.

The insolvency figures for the last three months of 2007 saw a noticeable slowdown against the last three months of 2006. Most of that relates to a dispute between the banks and the ambulance-chasing IVA firms that sell a fixed five-year insolvency plan. The banks have blocked customers using IVAs because they hate the charges imposed by the IVA firms and the claims they make to negotiate away up to 80% of the debt, at the bank's expense.

A hiatus in the number of people taking IVAs is unlikely to last, though. According to most professionals in the insolvency industry, a combination of the credit crunch that is restricting lending across the board, and the banks' determination to reel in the backlog of "debts", will push the numbers up again over the next year.

Will this trigger the UK's own sub-prime crisis? At the moment that possibility looks remote. Talk to the Bank of England and it is sanguine about the effects on the economy. A report out yesterday from the National Institute for Economic and Social Research said fears for the economy were overstated. The independent thinktank said that outside the finance industry in London, commerce and industry was in good shape.

The tragedy is more for the people involved. They are not, in the main, spendaholics who have been served their just deserts. They work on short-term contracts that are not renewed. They are the recently divorced and the poorly educated. They bought Christmas presents in hope that something would turn up to pay the bills. They are financially illiterate in a world where the sale of loans is becoming ever more complex.



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