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
Saturday 17 June 2006
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.
Fuel poverty could kill 100,000 vulnerable people over the next 15 years, charity warns
Phoenix Life: Chance of a refund for overcharged policyholders has risen
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Simon Read: That's right, BT, they'd rather pay for a free service
Bank-beating exchange rates on your international payments
- 1 Forget 'The Dress': Here are five of the biggest news stories you might have missed
- 2 The black and blue dress: Makers considering a white and gold version
- 3 PornHub turns masturbation into energy in bid to save the planet
- 4 The remarkable archaeological underwater discovery that could open up a new chapter in the study of European and British prehistory
- 5 Saudi Muslim cleric claims the Earth is 'stationary' and the sun rotates around it
New theory could prove how life began and disprove God
Half of Ukip voters say they are prejudiced against people of other races
This is what it's like to be dead, according to a guy who died for a bit
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Ukip would cut billions from Scottish budget to fund English tax cuts
iJobs Money & Business
£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...
£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads