By Martin Hickman, Consumer Affairs Correspondent
A debt-fuelled spending splurge at Christmas is set to push thousands of individuals into crisis and cause record bankruptcies in coming months as consumers struggle to pay off credit cards. According to the accountancy firm Grant Thornton, at least 20,000 people in England and Wales will become insolvent by the end of the quarter in March, and 66,000 individuals by the end of 2006. Both figures would be the highest since records of personal debt began 45 years ago.
Shoppers are thought to have been tempted into splashing out more than they could afford on food and presents at Christmas and on bargains in the new year sales. After a slow start retailers reported brisk business in December, and the bill for Christmas is almost certain to top the £10bn of 2004. The spree comes as personal insolvency surges at an annual rate of more than 30 per cent. Citizens' Advice Bureaux are reporting "huge numbers" of debt calls, and the Consumer Credit Counselling Service predicts bankruptcies will double in the next few years.
Personal debt in Britain amounts to £1.13 trillion, a figure that is growing rapidly. One-fifth of that total is unsecured lending, and UK consumers account for two-thirds of total credit card debt in the EU. Experts predict that a recent boom in "easy" credit offered on relatively lax criteria will end in catastrophic debt levels for many individuals.
Debt-fuelled spending has helped to keep the UK economy afloat by maintaining high consumer demand. But it causes serious problems for about 5 per cent of borrowers, who cannot manage their finances or whose relationships break down or who lose their jobs. Some rack up unsecured debts of more than £100,000 before their finances eventually collapse. Thirty-four per cent of men and 40 per cent of women keep their financial meltdown secret from their partners.
Catherine Thomson, 27, is a City worker who, though not in fear of bankruptcy, faces a lean start to the new year after spending £600 at Christmas, which she will have to pay off in addition to thousands of pounds of student debt. She said: "The expenses surrounding Christmas really add up and probably cost more than presents themselves - train tickets to visit family, wine when you visit friends for lunches, going out for dinner with friends and work colleagues."
Grant Thornton estimates that some 6,500 of the 20,000 personal insolvencies in the first quarter will stem from "excessive Christmas spending". Mike Gerrard, Grant Thornton's head of personal insolvency, said: "A little overspend will not break the bank for most, but for those who are already financially stretched, spending that little bit more during the festivities may represent the last straw, plunging individuals in already precarious financial positions further into debt and quite possibly towards bankruptcy."
He explained: "An individual with serious debts will typically have a mortgage in the region of £50,000 to £100,000 and commonly credit and store card debts of £50,000. While this may sound like a warning call to stay away from the high street, the fact remains that we regularly see people, especially over Christmas, add to their problems in quite a substantial way."
Anyone who can no longer meet their monthly repayments may be forced into insolvency, either through an Individual Voluntary Arrangement, a repayment plan with lenders, or bankruptcy.
Bankruptcy has become an easier option for individuals in the past 18 months with the introduction of the 2002 Enterprise Act. For a fee of £500 most borrowers are freed of debt and bankruptcy ends after one year, though there may be continuing problems obtaining credit.
The Government believes that the overall level of debt is manageable. But the banks are becoming concerned about the number of individuals who overstretch themselves and cannot pay back their capital. Last month four credit card companies - Barclaycard, Egg, Co-op and Abbey - agreed to share information about individuals and launch an early warning system for borrowers in trouble.
According to the Government's figures, more people became insolvent in the first nine months of last year, 48,703, than in the whole of 2004. In Scotland, insolvency soared by 50 per cent year-on-year in the summer of 2005.
Mortgage repossessions are also up - by 66 per cent in the third quarter of last year - triggering fears that a sudden rise in interest rates or unemployment could cause widespread financial distress. The average debt of clients approaching the Consumer Credit Counselling Service is £29,000. The number with "extreme" debts of more than £100,000 has almost doubled in the past year. Malcolm Hurlston, the charity's chairman, believes bankruptcy is an increasingly tempting and acceptable way out of debt.
"There are two things that stop people going bankrupt," he said. "One is stigma and one is the cost. Out of the people we advise, we advise far more people to go bankrupt than do go bankrupt, and there is scope for a very substantial increase as the social climate changes. There is little to stop the number of bankruptcies doubling in the new few years."