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Interest rate rises could leave borrowers facing bankruptcy

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Even a small interest rate rise could put the record number of people choosing to deal with debt via individual voluntary arrangements back in danger, accountants warn.
Interest rate rises could leave borrowers facing bankruptcy

According to the latest figures from the Insolvency Service there were more than 14,500 individual voluntary arrangements (IVAs) – a formal repayment proposal used to avoid bankruptcy – in the second quarter of 2014, the highest number in any quarter since they were introduced in 1987.

Meanwhile bankruptcies have fallen 15.9 per cent from the same period in 2013.

But according to Mark Sands, personal insolvency partner at Baker Tilly, an interest rate rise could spell trouble for those opting for debt repayment agreements over bankruptcy.

He said: “The latest figures from the Insolvency service are a sign that people are confident enough in their financial prospects to commit to a five year regular payment plan to settle up their debts in full with the balance then written off, and reflects the ongoing positive effect of record low interest rates.

“It is to be hoped that many of those people entering IVAs now will be able to see them through to their successful conclusion, but the prospect of interest rate rises, even if gradual and limited as promised, will have a significant impact on those whose budgets are already tight.”

According to Sands a two per cent interest rate rise on a 25-year five per cent repayment mortgage of £150,000 could raise monthly mortgage payments by around £180, potentially wiping out the money needed to meet IVA obligations.

He concluded: “Some borrowers will either have to rein in their spending or face the prospect of bankruptcy.”

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