WSJ: Personal bankruptcies surge in Britain



Personal bankruptcies surge in Britain
After borrowing on cheap, individuals are buried under mountains of



November 17, 2005

LONDON -- With rising interest rates pushing repayments on her
£28,000, or $48,126, debt higher, Rebecca Taylor had run out of

A small debt built up while in college gradually got bigger as banks
issued her new credit cards and overdraft protection. Earlier this
year, the 32-year-old Manchester office manager concluded bankruptcy
was the only way out. "I felt I would never be able to escape this
mountain of debt any other way," she says.

She is one of thousands of debt-strapped Britons who lived on credit
during an era of low-interest rates and now find their backs to the
wall as rates reverse direction. Personal bankruptcies surged to 12,043
in the third quarter of this year -- nearly 31% higher than a year
earlier and the largest number since 1960, exceeding the previous
record of 9,435 in the first quarter of 1993, when the U.K. was in the
final stages of its last big recession.

Perhaps more worrisome, the number of repossessions -- where lenders
take ownership of mortgaged property -- rose to 29,991 between July and
September, 55% higher than a year ago and the highest quarterly level
since 1993. Such debt secured by property dwarfs the credit-card debt
that accounts for the bulk of personal bankruptcies.

The Bank of England says there is no cause for alarm because the
growing number of consumers struggling to meet their debts amounts to a
tiny fraction of the U.K. population -- roughly 0.2% -- and is unlikely
to have much impact on spending.

But some economists disagree. "If bankruptcy levels continue to
increase at the current rapid rate for another two quarters or so, then
the central bank should start to become more concerned about the
pressure U.K. consumers are under," says Vicky Redwood, an economist at
Capital Economics, a consultancy based in London.

More broadly, the 12 European Union countries that use the euro as
currency could face similar pressure now that the European Central Bank
is signaling it is prepared to raise rates after holding the key
lending rate at 2.0% since June 2003.

Bankruptcies are on the rise in European countries with relatively high
unemployment rates.

In Germany, where the unemployment rate stands at 11.6%, the number of
personal insolvencies increased 40% to 6,097 in August from the
year-earlier month, according to the German Federal Statistics Office.
(In the U.S., where interest rates also have been increasing, personal
bankruptcies increased 49% to more than two million in the first 10
months of this year, compared with the same period in 2004, according
to Lundquist Consulting Inc. of New York.)

"Although we are in the very early stages of any rate hiking cycle in
the euro zone, there will certainly be an impact on cash flow for those
over-leveraged consumers," says Ed Teather, an economist in London at

The rise in problem debts is starting to pinch lenders, though so far
income from other sources such as investment banking is keeping profits

For the first six months of 2005, U.K. bank HBOS PLC reported a nearly
44% increase in bad debts compared to the year-earlier period, while
Barclays PLC reported a 20% rise.

The sharp rise in bankruptcies partly reflects a change in U.K. law,
which made bankruptcy a less punitive option.

Under the change, which took effect in April 2004, most people filing
bankruptcy will be freed from restrictions imposed on them in one year
or less, rather than the three years that was the previous average
period. The change was made to encourage entrepreneurial risk taking.

But interest-rate changes also triggered the surge in borrowing and
subsequent increase in distressed borrowers, economists say.

Starting in 2001, the Bank of England lowered rates to 3.5%, a level
not seen since the 1950s. The cuts were intended to stimulate consumer
spending to keep the U.K. growing at a time when the global economy was
in a slowdown. The Bank of England knew there would be a buildup in
debt, but believed the consequences wouldn't be severe.

Then, with the global economy in recovery, the central bank changed
course with five successive rate increases between November 2003 and
August 2004. "Many people have borrowed to their limits," says Howard
Archer, a London economist at Global Insight, an economics consultancy.
"This has made them vulnerable to the higher interest rates that
resulted from the Bank of England's tightening of monetary policy."

The squeeze is being felt by homeowners struggling to make mortgage
payments -- debt that could have a bigger impact on the economy.

Loans secured by property totaled £9.39 billion ($16.3 billion) in
September, compared with £1.9 billion in credit-card debt and
unsecured bank loans.

"The main reason behind the upturn in repossession activity is the rise
in interest rates that began at the end of 2003," says Andrew Smith, an
official at the Royal Institution of Chartered Surveyors, a U.K. group
representing property surveyors.

While the Bank of England cut rates to 4.5% from 4.75% in August,
further reductions appear unlikely in the near future with the
inflation rate well above its 2.0% target.

And with the numbers of unemployed rising to 890,100 from a low of
813,800 in January, bankruptcies are likely to continue to run near
current levels for some time to come, economists say.

"The U.K.'s mountain of personal debt continues to have no peak in
sight," says Mike Gerrard, a personal insolvency specialist at Grant
Thornton UK LLP, a financial adviser with 33 offices in the U.K.

For Ms. Taylor, who reached £4,500 limits on three credit cards and
£1,500 limits on two overdrafts, going though bankruptcy "was a
relatively quick and painless process involving completion of paperwork
and attending court," she says.

But it isn't an experience she cares to repeat. "My credit rating is
obviously damaged, and in the future, to gain credit I will probably
have to pay much higher rates and may be limited as to which banks I
can gain credit with."


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