Debtors are warned that bankruptcy is no soft option

Changes to the law may make this seem an easy way out, but there are many pitfalls. David Prosser reports

Thousands of cash-strapped borrowers who are preparing for bankruptcy have not understood the hardship they will face as a result, according to a warning from the debt specialist One Advice. It claims more than 110,000 people are considering declaring themselves bankrupt this year, in many cases because - wrongly - they consider it to be a soft option.

"A growing number of people with huge debts, and recent changes to legislation making it easier for people to climb out of bankruptcy have resulted in a huge increase in personal insolvency applications," says One Advice's chief executive, Chris Holmes. "However, many successful applicants will be unaware of the difficulties they face as a result of doing this."

Almost 15,400 people were declared bankrupt in the first quarter of the year , a 12 per cent rise on the last three months of 2005, and a 51 per cent increase on the same quarter of last year. The increases reflect a five-year trend - the number of personal bankruptcies has risen every year since 2001, but began to spike particularly sharply upwards in 2004.

Tony Supperstone, a consultant at accountants BDO Stoy Hayward and president of R3, the insolvency practitioners' trade body, says the Enterprise Act passed that year has lessened the stigma attached to bankruptcy. "It now looks very attractive - you can be discharged from bankruptcy after six to 12 months, with all your debts cleared."

Frances Walker, of the Consumer Credit Counselling Service (CCCS), says someone going bankrupt can now expect to be discharged after an average of eight months, compared with at least three years before the law changed. "Many borrowers see bankruptcy as a new lease of life," she says. "For many, being free from the worry of the debt is such a relief that it is worth the consequences of the bankruptcy." The problem, debt experts warn, is that borrowers may not realise how serious those consequences are.

To start with, bankrupts lose all control of their assets, including possibly even their share of the family home. The official receiver, or an insolvency practitioner, divides up the assets and shares them out among the bankrupt's creditors.

"Bankrupts are not allowed to obtain credit of more than £250 and have to seek permission to use bank accounts and credit cards - only basic living expenses can be paid, with any surplus going to pay off creditors," adds Holmes. "Any income earned during the bankruptcy order can be claimed against for an income repayment order for up to three years." That's assuming the bankrupt is able to earn an income. In professions such as the law, bankruptcy could mean losing your licence.

All insolvencies stay on your credit file for at least six years. As a result, bankrupts are likely to find it particularly tough to get credit for an extended period after being discharged - the best case is they will have to pay substantially higher rates of interest. For these reasons, the CCCS says bankruptcy only makes sense for a small number of people with debt problems - of the cases it handled in the first quarter of the year, it recommended bankruptcy to just 12 per cent of borrowers. "If you're a young person without much in the way of assets, it can make sense," says Walker. "But bankruptcy does still have very serious implications."

A better bet, for many borrowers, may be to come to an agreement with creditors - either an informal pact to make fixed repayments over a set period, or an individual voluntary arrangement (IVA), a legally-binding deal that is less serious than full-blown bankruptcy.

The downside to IVAs is that it is likely to take much longer to be clear of your debt - five-year plans are common. But borrowers retain much more control of their assets, and their professional status is less likely to be affected. And the impact on your credit rating will also be less disastrous.

Ways to deal with a debt crisis

* Debt management plans: This is the least formal way to get on top of your borrowing. The idea is to persuade your creditors to agree that you will repay what you owe over a realistic time period - say five years - with affordable fixed payments each month.

* You can try to negotiate with creditors yourself, by writing to them to propose a repayment schedule. Alternatively, groups such as Citizens Advice and the Consumer Credit Counselling Service will negotiate on your behalf, usually for free. Bear in mind that you can't force lenders to agree to this sort of scheme. And the agreement is not legally binding - you could be asked to pay in full later.

* Individual voluntary arrangement (IVA): An IVA is a more formal version of the first option, and requires an authorised insolvency practitioner to arrange and oversee the deal. All your lenders can be forced to accept the terms of the IVA if 75 per cent of creditors by value of the total debt agree.

* Insolvency practitioners charge a fee for their services, which will add to your debt. But they may be able to negotiate a freeze in interest charges.

* Bankruptcy: This is the most extreme option. Your assets - including property - are divided up between your creditors, with the insolvency courts ruling on who gets what. You may be discharged after a year, leaving you debt free, but the bankruptcy remains on your credit file for six years, with serious implications for your finances.

PROMOTED VIDEO
Sport
Ashley Barnes of Burnley scores their second goal
footballMan City vs Burnley match report
News
news
News
Sir James Dyson: 'Students must be inspired to take up the challenge of engineering'
i100
Life and Style
Apple showed no sign of losing its talent for product launches with the new, slightly larger iPhone 6 making headlines
techSecurity breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Arts and Entertainment
Catherine (Sarah Lancashire) in Happy Valley ((C) Red Productions/Ben Blackall)
TV
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

    Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

    Selby Jennings: Quantitative Research | Equity | New York

    Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    Day In a Page

    A timely reminder of the bloody anniversary we all forgot

    A timely reminder of the bloody anniversary we all forgot

    Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
    Homeless Veterans appeal: Former soldiers pay their respects to a friend who also served

    Homeless Veterans appeal

    Former soldiers pay their respects to a friend who also served
    Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

    Scarred by the bell

    The downfall of the TV star charged with bar stabbing
    Why 2014 was a year of technological let-downs

    Why 2014 was a year of technological let-downs

    Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
    Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

    Will revolutionary Cuba take 'bourgeois' golf to its heart?

    Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
    The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

    The Locked Room Mysteries

    As a new collection of the genre’s best is published, its editor explains the rules of engagement
    Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

    How I made myself Keane

    Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
    Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

    Parting view of Ofcom chief... we hate jokes on the disabled

    Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
    A look back at fashion in 2014: Wear in review

    Wear in review

    A look back at fashion in 2014
    Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

    Ian Herbert: My 10 hopes for sport in 2015

    Might just one of them happen?
    War with Isis: The West needs more than a White Knight

    The West needs more than a White Knight

    Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
    Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

    'The day I was shot by the Taliban'

    Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
    Revealed: the best and worst airlines for delays

    Revealed: the best and worst airlines for delays

    Many flyers are failing to claim compensation to which they are entitled, a new survey has found
    The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

    The stories that defined 2014

    From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
    Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

    Disaster looming? Now you know where to head...

    Which British city has become the first to be awarded special 'resilience' status by the UN?