Is there a bubble in the bankruptcy business?

Is there a bubble in bankruptcies? Some people like to blame the new bankruptcy rules for record insolvency levels - but the weakness of the UK economy suggests this is one trend that will run and run.

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Is there a bubble in bankruptcies?

The number of personal insolvencies hit a new record high in the first three months of this year, rising to 23,351 from 20,679 in the fourth quarter of 2005. That's up 73% on a year ago. The number of bankruptcies is now more than double its last peak, in the early 1990s.

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But some point out that the increase in insolvency is being driven primarily by people seeking to go bankrupt, rather than by lenders taking people to court. That's partly because rule changes in 2004 made it far easier for people to write off their debts.

So is the surge in bankruptcies set to level off - or is this one trend that shows no sign of ending any time soon?

More people than ever are going bankrupt - and it's not just because more of us have access to credit than ever before. The number of bankrupts per £1bn (inflation adjusted) of unsecured debt has now passed its previous peak in the early 1990s, according to Vicky Redwood at Capital Economics.

But could this be because bankruptcy is not only easier, but is also being actively promoted as a way to escape debts in a relatively pain-free manner? The number of Individual Voluntary Agreements - where a debtor promises to repay all or part of their debts over an agreed period, in exchange for the rest being written off - has trebled in the past year. Listed insolvency practitioners like Debt Free Direct and Debtmatters have seen their share prices soar on the back of this bankruptcy boom. For more details, and some other companies that have benefited from the increasing UK debt mountain, click here: How to profit from bankruptcy

It's comforting for some to imagine that the surge in insolvency is more to do with rule changes than the fact that the UK is now carrying around £1.2 trillion of debt.

But there is still a problem with this explanation. Even if people are using bankruptcy as an 'easy' way to escape their debts, that money doesn't just vanish. Someone has to pay - and that someone is usually the creditors.

But creditors are wising up. The amount of unsecured credit taken out by consumers is falling - consumer credit rose by just £281m in March, its lowest level since February 1994.

But that's not because consumers are getting more careful with their money - it's because lenders are making it tougher to get unsecured loans. A recent reports from market analysts Datamonitor on concluded that: 'As a result of increased indebtedness and lenders adopting a more precautionary approach to lending, consumers with a less-than-good credit history may find it more difficult to get access to cheap credit.'

Of course, there's still another way for consumers to get their hands on extra debt. Consumer credit growth has slowed, but remortgaging remains strong. Lenders are making it more difficult to get unsecured lending, but they're falling over themselves to offer people secured lending - that is, money secured against the value of their homes.

That might seem like a contradiction, but of course it's not. Unsecured lenders don't have much hope of seeing their money returned if a customer goes bankrupt. But a secured lender gets a nice new house to sell to the highest bidder.

And there's evidence that this is happening. The number of court actions brought against homeowners by mortgage lenders went up by 8% in the three months to March. That figure was up by almost a third compared to the same time last year, and is now at its highest level since 1993.

So if you're thinking of remortgaging to move your credit card debts and overdraft to a 'cheaper' rate of interest, you should read MoneyWeek editor Merryn Somerset Webb's recent column on that very topic first - it may well make you think twice: Why remortgaging could cost more than you think

Turning to the stock markets

The FTSE 100 ended Friday up 57 points at 6,091. Mining stocks were among the main gainers as metal prices maintained their strong run. Xstrata rose 5% to £22.54. But banking group Alliance & Leicester was the top riser, up 7% at £12, as rumours of a takeover bid from Abbey predator, Spanish bank Banco Santander raced around the stock market. For a full market report, see: London market close

Over in continental Europe, the Paris Cac 40 rose 52 points to 5,286, while the German Dax gained 73 to close at 6,113.

Across the Atlantic, the week ended on a high note as the monthly payrolls report for April showed a much weaker rise in employment than had been expected. Not exactly good news, you might think - but investors took the anaemic rise to mean that US interest rate rises will not have much further to go. The Dow Jones jumped 138 points to 11,577, its highest close in six years. The S&P 500 closed up 13 points at 1,325 and the Nasdaq rose 18 to 2,342.

In Asian markets this morning, the Nikkei 225 made gains, rising 137 points to 17,291. Exporters were hit by the weaker dollar, but news of an increase in land prices sent property developers higher. Japan's average land price rose for the first time in 15 years during 2005, up 1.4% on the year before.

This morning, oil edged higher in New York, trading at around $70.25 a barrel. Brent crude was higher too, trading at around $71.05.

Meanwhile, spot gold hit a new 25-year high, rising to $684.70 an ounce before easing back to $681. Silver was trading at around $13.94 an ounce.

And here in the UK, shares in broadcaster BSkyB have been hit by news that it is paying nearly twice as much per Premier League football match as it did for its existing deal.

And our two recommended articles for today...

Should you invest in platinum and palladium?

- Platinum and palladium have been largely ignored by investors, despite having a larger combined global market than silver. But that's starting to change as interest in commodities soars, says Martin Spring in the On Target newsletter. To find out the best ways to get exposure to these metals, click here: Should you invest in platinum and palladium?

Why the dollar is set to plunge

- The US dollar strengthened during 2005 despite America's massive twin deficits. But with hints that the US interest rate-tightening cycle is drawing to a close, the greenback's luck may have run out, say Andrew Selsby and John Robson at RH Asset Management. Central banks around the world are cutting their dollar reserves and developed economies are calling for the 'global imbalances' embodied in the US trade deficit to be rectified. To find out how far the dollar could fall, click here: Why the dollar is set to plunge

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.