There has been a dramatic increase in the number of people declaring themselves bankrupt or insolvent this year, as increasing unemployment and the looming recession starts to take its toll on consumers.

There were 27,087 individual insolvencies in England and Wales between July and September, an 8.8 per cent increase on the previous quarter. About a third were Individual Voluntary Arrangements (IVAs) and two thirds were bankruptcies.

An IVA is a deal made between creditors and those in severe debt, overseen by an insolvency practitioner, that can reduce repayments significantly. Bankruptcy is the traditional way of escaping unmanageable debt, and usually results in the borrower losing their home to pay creditors.

Separate figures have also revealed that insolvency is hitting higher earners – the average income of an IVA applicant has increased to £23,750, almost 10 per cent higher than last year when the average income was £21,666, according to TDX Group, an IVA specialist.

Mark Onyett of TDX Group said: “IVAs are no longer the domain of lower earners. The dual impact of inflation and the reduction in availability of cheap credit solutions means that more higher earners are now taking out IVAs, and people are being forced into them sooner than ever, as their options are becoming increasingly limited.”

Experts predict that the number of people declared bankrupt or insolvent will continue to rise as the economic downturn gathers pace.

Mark Sands, director of personal insolvency at KPMG, a tax specialist, said: “The downturn and the associated increases in unemployment are starting to have an impact. This is being seen not only in the increase in personal insolvencies but also in the related issues of increased mortgagee possessions and the greater use of charging orders by unsecured lenders who have not been paid.

“Whilst consumers will fight to keep their family homes, and both lenders and the courts have systems in place to ensure that possession is the last resort, once the property is sold there is often little reason for someone with other significant debts not to declare themselves bankrupt.”

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