Under our feet, the rumbling of a volcano grows louder. Every new report on rising debt – personal, household, small business – echoes the 2008 crash. Christmas tightens the screw, plunging families deeper into debts they can never escape.

The number of people registering as insolvent has reached a five-year high. As pay packets are squeezed by inflation, households use credit cards for basic bills – energy, water, council tax, rent. That’s unsustainable as interest accumulates. Citizens Advice says consumer borrowing has reached £200bn – a level unseen since before the crash.

According to the Bank of England, the growth in personal loans and credit card debt outstrips growth in earnings by almost five times. The Resolution Foundation reports a surge in debt, up by 10% over the last year, after the longest fall in living standards ever recorded. Once in debt, people are tipped over the edge by small crises – such as the alarming growth in high mortgage debt, with a rising proportion of repayments taking 40% or more of a family’s income.

Unsurprisingly, the Organisation for Economic Co-operation and Development (OECD) warns that soaring household debt and flatlining wages are a major risk to financial stability, with Brexit slowing the economy. Economists expect a serious economic jolt roughly once every 10 years: 2018 has an unwelcome ring to it. Another crash this time would find a less resilient country, with many households already stretched to their limits.

The whole economy – and everyone in it – is imperilled by this debt, but at the sharp end is a trail of individual misery. There’s nowhere better to observe the human fallout than in the bankruptcy court, a modern block tucked away behind the gothic splendour of the high court in the Strand. Every day, in quiet rooms, judges rattle through lengthening lists of debt disasters.

Few debtors turn up, no doubt devoid of hope. The main creditor is the state, HM Revenue & Customs seeking unpaid VAT and income tax, or councils chasing council tax. The state has first call. At first sight, there is nothing Dickensian about the process: judges are kindly, generous in granting adjournments to let debtors try to raise money before the axe falls.

There is no Marshalsea debtors’ prison now, and laws are less draconian: debt relief orders, individual voluntary agreements and bankruptcy itself can stop the bailiffs, while imposing a three-year ban on further borrowing.

Even so, bankruptcy still hangs heavily on the sorry debtors in these courts, overwhelmed with a sense of failure, humiliation and loss. I met none with a jaunty devil-may-care attitude.

She was offered a bank overdraft without asking. 'Respectable' banks can be as bad as the door-to-door debt companies

One man, I’ll call him Brian, found the peak-time train fare from Cheshire a hard extra cost to bear, “but I can’t afford a lawyer”. Timid and sad, he says: “I just felt I should face this.” HMRC claims he owes £46,000 in VAT on his small business. “I have to tell the judge that sum is based on what my business used to yield, but it’s gone right down.” What happened? He makes promotional products for companies – branded sticky notes, and pens. But clients have fallen away, spending less in these hard times and paying bills late. Indeed, the Federation of Small Businesses finds a third of its members debt-laden, using credit cards to get by.

Brian doesn’t tell the judge the whole story of his falling order book, his mental breakdown, how his book-keeper left, leaving his accounts in a mess. “I have a lot of issues in my life,” is all he tells her. He looks defeated and fearful, ashamed to be here.

A parade of small businesses tells the same story. Alan’s company making blinds has gone bust, and he owes £30,000 in back tax, plus £680 in the costs of these proceedings. “I begged the official receiver to give us time to keep us going, but they wouldn’t.”

Henry, a management consultant in an elegant beige coat with a velvet collar, fell into debt as a result of clients’ failure to pay. A shopkeeper, whose takings have fallen steeply, begs for time to get his uncle to pay his £20,000 tax debt: the judge sounds doubtful, but agrees. Maureen, in tears, owes £10,000 in tax: she gets her adjournment, and the judge sends her to Citizens Advice for help.

Citizens Advice, itself hit by cuts, is flooded with debt cases. One such is Angela, a single mother from Yorkshire, with debts of £5,000. Her ex-partner lost his job and stopped paying towards their child. The finance company Vanquis offers high-interest credit cards to those with bad credit ratings – and Angela’s soon got out of control. Catalogues offered her too much credit, “and I was tempted, as I had nothing. I paid off £5 a week, but the interest kept growing.” When she borrowed £100 from Wonga it grew into a £200 debt. She was offered a bank overdraft without asking for it: “I used it when I had nothing else, just to pay the water, gas and electricity, but I couldn’t pay.”

A debt relief order has saved her from harassing creditors – but what next when her income doesn’t ever cover bare necessities? Soon she will move on to universal credit: that heavy loss will upturn her finances again.

The “vicious cycle” reported by the debt charity StepChange is the 2 million people stuck in permanent bank overdraft debt: the charity calls for a ban on unauthorised overdrafts. “Respectable” banks can be as bad as the door-to-door debt companies.

Through the bankruptcy court come people of all kinds. StepChange says as many as 4 million are in serious credit card debt – so losing a job, a relationship break-up or falling ill can easily upend fragile finances. All those I meet see their troubles as a private matter of struggling to stay afloat; they blame themselves, guilty about debts they couldn’t avoid.

But these are not private troubles. They are the direct consequence of government policy. Paying people too little, tightening the austerity tourniquet, cutting tax credits and benefits, allowing extortionate lending, shredding public services, permitting gig jobs, freezing public pay – all these cause penury, by official policy.

Soon other people’s debt problems will become everyone’s. As the OECD warns, rising debt is a warning flare about the state of the economy. Private debts are everyone’s national risk as household liabilities reach £1.9 trillion, mostly unsecured. That’s almost as high as on the eve of 2008. Happy new year.

• Polly Toynbee is a Guardian columnist