WHEN Peter Mandelson was trade and industry secretary, he came back from a trip to America on a mission to foster a greater spirit of entrepreneurialism in Britain by introducing a US-style insolvency regime.<br /><br />He wanted to create a “nation of entrepreneurs” and his belief was that everyone deserved a second chance if they failed. Removing the stigma of failure included changing the process so that individuals could discharge themselves from bankruptcy after 12 months. <br /><br />Fast-forward to today and Britain is in the depths of a recession and saddled with record levels of personal debt. This recession is the first real test of what one insolvency practitioner calls “a whole new set of tools to help businesses and individuals get back on the straight and narrow” that emerged from the Enterprise Act. But new allegations of individuals abusing the system are doing the rounds, stories which, in fairness, are as old as the Enterprise Act itself and based mainly on anecdotal evidence. But we should not ignore the rumours as they may be an early sign of a huge rise in personal insolvencies to come.<br /><br />One fear is that there are unscrupulous individuals who are taking advantage of the rules to rack up huge debts and then declaring themselves bankrupt, only to see the slate wiped clean after a year. Quarterly Insolvency Service statistics show the number of individual insolvencies was 29,774 during the first three months of 2009. While up only 1.6 per cent on the fourth quarter of 2008, the figure is a massive 19 per cent higher than the first quarter a year earlier. When the next set of data comes out in a fortnight’s time, it is expected to show another significant rise in recession-related bankruptcies. <br /><br />Although the Insolvency Service itself declines to make forecasts, industry practitioners believe that we could see almost 140,000 people declared bankrupt during 2009. On top of that R3, the Association of Business Recovery Professionals, believes another 700,000 people are left off the official list even though they are technically insolvent. This is because they are in informal and lightly-regulated debt management plans and repaying their debts to creditors gradually. Until these insolvent individuals are included in the official figures, the full impact of the current recession on personal bankruptcies is impossible to assess.<br /><br />Even more worrying, perhaps, is the fact that the lag effect on personal insolvencies is typically six to 12 months – when businesses close, there is a gap between people being made redundant and then collapsing into the quagmire of unmanageable debt as they struggle to keep up their repayments. The scary thing is that even if the economy begins to improve dramatically as we move out of recession, the number of people being declared bankrupt could go on rising for a long time to come.