Bankruptcy dodge can haunt students

Students in financial difficulty could be shooting themselves in the foot by going bankrupt, Wilkins Kennedy, the chartered accountant, says. The soaring cost of higher education has left students increasingly tempted to wipe the slate on their debts after graduating by petitioning for bankruptcy, writes William Kay.

But Keith Stevens, the Wilkins Kennedy insolvency partners says: "Many of those who opt for bankruptcy are young and, because they do not own property or other high-value assets, they feel they have nothing to lose by writing off debt. What they don't realise is that even if they don't own a house the effect on their long-term credit rating will make getting a foothold on the property ladder that much more difficult, and costly."

Last May, student loans were added to the Insolvency Service's list of debts that could be written off in bankruptcy. But, Mr Stevens says, it will often be better for students to restructure their debts by reaching an agreement with their creditors in what is known as an individual voluntary agreement (IVA).

"The difference in lending rates between IVA and bankruptcy status over the course of a mortgage could cost thousands," he says.

Department of Trade and Industry figures show the number of individual insolvencies for the third quarter of 2003 at 9,094, a 16.9 per cent increase on the similar time last year and the highest quarterly level since the early 1990s' recession.

Mr Stevens says that when an individual is bankrupt, assets seized to pay creditors are sold at "fire sale" prices, a tenth of their market value. That means if a person owes £5,000 creditors will instruct bailiffs to seize assets worth £50,000.

"A bankrupt can lose assets of a far greater value than the debt they owe. By restructuring debts you retain some control over how your assets are disposed of. If you have to sell your assets, an IVA should give you breathing space to get a reasonable market price," Mr Stevens says.