by Jonathan Prynn
Evening Standard

Up to half a million people will be overwhelmed by their debts over the next three years, a leading City economist warned today.

Levels of personal insolvency are expected to rise to record levels as the recession takes hold and unemployment soars.

Official figures today show the number of insolvencies rose nine per cent to 27,087 in the third quarter.

The total is expected to hit around 110,000 for the year as a whole and at current rates 275 people a day are falling into insolvency or bankruptcy.

This is likely to be the start of an insolvency explosion as consumers who took on too much mortgage, bank and credit card debt find they are unable to cope.

Vicky Redwood, UK economist at Capital Economics, predicted the total will hit 140,000 next year, rising again in 2010 before peaking in 2011. Over the three years it is likely that as many as 500,000 people will have been forced into bankruptcy or other forms of personal insolvency, she said.

The figures are far higher than in the last recession in the early Nineties, partly because levels of debt are much higher, but also because new laws have made it easier to recover from bankruptcy. Outstanding personal debt now stands at just under £1.5trillion.

The expected wave of insolvencies will place extra strains on banks as they are forced to write off billions of pounds of loans.

Banks are also taking a harder line with borrowers who might previously have been able to take out new loans to tide themselves over.

Stephen Grant, insolvency partner at accountants Wilkins Kennedy, said: "The number of personal insolvencies is likely to go through the roof as falling house prices and rising unemployment begin to bite."

Louise Bond, personal finance manager at comparison website uSwitch.com, said insolvency or bankruptcy should "be the last resort for anyone with financial problems as they have a very serious impact on people's credit histories".

Today's figures from the Government's Insolvency Service also show a rise in the number of company liquidations, up 26.3 per cent in a year to 4,001 in the three months to the end of September. The number of larger firms going into receivership or administration is up 70 per cent to 1,277.