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Worrying trend for individual insolvencies

Businesses should feel comforted by the reduction in the number of firms going into liquidation in the latest quarter, says accountants and business advisers PKF East Anglia.

But they should not rest on the assumption that they are safe from hard times, particularly if their businesses rely on consumer spending, warns David Merrygold, an insolvency practitioner with PKF.

He says the rising number of personal individual insolvencies is a worrying factor.

According to the government, in the latest quarter there has been 10 per cent increase of people either going into bankruptcy and a 47.6 per cent increase in Individual Voluntary Arrangements compared to the same period last year.

But Mr Merrygold warns that more people should be going bankrupt rather than being mis-sold IVAs. He blames so-called 'debt counsellors' who profit from arranging IVAs by persuading people to enter into them to stave off bankruptcy against their best interests.

He said: "Most people who entered into an IVA last year would have been better off being declared bankrupt rather than struggling and, ultimately, failing to make payments to their creditors. No-one is pretending that bankruptcy is a good thing but the reality is that, in the majority of cases, the terms of IVAs are too much for most people in serious debt to cope with.

"Many are in this situation because they have failed to manage their finances effectively and have opted for credit they could ill-afford. To expect these people, who are often on low-incomes, to exist on extremely tight budgets for an extended period is quite frankly expecting too much. Another rate rise next week, with more to follow this year will simply make the position worse for them.

"Ultimately, they end up fighting to make repayments but fail and end up in their original position. The disgraceful thing is that there is an industry that is profiting hugely from arranging IVAs against their clients' best interest. That is morally reprehensible."

Mr Merrygold believes that the majority of the 44,332 people who entered into IVAs in 2006 will end up failing to meet the tough terms imposed by an IVA and become bankrupt before the end of the IVA's term - usually three years.

Article by BDO LLP

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