Nearly 70,000 people became insolvent in England and Wales in 2005, the highest level since records began in 1960. Official figures showed that insolvencies soared by 57 per cent to 20,461 in the last quarter of the year.

In most cases people declared themselves bankrupt, but the figures also showed an even sharper rise in individual voluntary arrangements (IVAs), an increasingly common alternative to bankruptcy in which houses are not automatically repossessed.

Divorce, sickness and sudden unemployment are well known to contribute to bankruptcy. But accountants gave warning that the rapid rise in insolvencies was increasingly a result of young people simply taking on more debt than they could ever afford to pay back.

“People are becoming addicted to credit,” Mark Sands, director of personal insolvency at the accountancy firm KPMG, said. He added that the average debts of those using IVAs was £60,000, of which creditors could only expect to receive about 38 per cent on average.

A study commissioned by the Government found this week that an inability to manage credit was given as the reason for financial failure in almost half of all bankruptcies.

Louise Brittain, head of personal insolvency at the chartered accountant Baker Tilly, said that credit companies were failing to make proper checks on their clients. “I see people with 20 or 30 credit cards on incomes of £15,000 a year,” she said. “This is the consequence of people being able to borrow money with no thought about how it’s ever going to be managed.”

She added that the Government’s changes to the law had played a part. The Enterprise Act, which came into effect in 2004, cut the time period in which a person is declared bankrupt from three years to one, a move she described as a “travesty”.

Analysts blame a growing awareness of the option of going bankrupt, together with the aggressive promotion of IVAs through advertising, for the surge in insolvencies.

In a further sign that a minority of people are finding their debts impossible to control, data from the Council of Mortgage Lenders yesterday showed a continued sharp rise in the number of home repossessions. These rose to 10,250 in 2005, the figures showed, up by 70 per cent from the previous year. It was the fastest rise in the figures since the end of the last recession in 1991.

Low interest rates and a healthy housing market have encouraged consumers in recent years to rack up debts of more than £1 trillion.

Ron Robinson, president of the Association of Business Recovery Professionals, said: “Personal debt is out of control in this country. Credit card companies are lending too much to people who can never afford to repay their borrowings.”

The new data from the Department of Trade and Industry showed that despite the worsening situation for consumers, there was some improvement in the situation for companies in the last few months of 2005. Company liquidations fell by 5.5 per cent on the quarter but were still up 8.5 per cent on a year earlier to 3,187.

But for 2005 as a whole, 2,257 companies in England and Wales hired administrators, an increase of 41 per cent from 2004.

Pat Boyden, of the accountants PricewaterhouseCoopers, said that the firm’s research showed that insolvency was becoming especially prevalent among young people, with men and women in their 20s and 30s showing the biggest rise in the past two years.

Analysts at the consultancy firm Capital Economics calculated that because of the rise in debt in recent years, the number of individual insolvencies would pass 100,000 this year.

Coming to an agreement to repay your debts

What is an individual voluntary arrangement? An IVA is a legally binding agreement between you and all the banks and organisations to whom you owe money. The repayments in an IVA typically last five years and are based upon a borrower’s income and expenditure. The payments are put into a trust account, which the IVA company uses to extract its fees and to pay banks and credit card companies.

How much will it cost? The schemes typically cost £5,000 but some IVA companies may charge more than twice this amount.

How long will an IVA last? An IVA plan typically lasts five years, after which the outstanding balance of a borrower’s debt is written off.

What happens if I go bankrupt? You are likely to lose your home, car and valuable possessions. You may also be the subject of an income attachment order: the trustee will take a slice of your salary for up to three years to repay your creditors and cover bankruptcy costs.

What are the consequences? Debtors have to wait up to a year before their bankruptcy debts are discharged. Non-discharged bankrupts cannot borrow more than £250. Once your bankruptcy debts have been discharged, you have the right to buy your own home and will also have a better chance of getting a personal loan or credit card. But most credit card companies will blacklist all bankrupts for six years.

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