Bankruptcy will be too easy, credit chief warns

ONE OF Britain's leading credit card executives predicted this week that new bankruptcy rules could throw the lending industry into chaos.

General Charles Krulak, a former US Marine who is now chief executive of MBNA Europe, says: "It is going to destigmatise the concept of bankruptcy. It's not good for a bank, a credit card company or whoever's loaning money to have people feel the way to get out of this is not to work out an arrangement with the lender."

Under the new Enterprise Act, from April bankrupts will be discharged within 12 months or less, rather than the present three-year minimum.

The financial affairs of an undischarged bankrupt are controlled by an official receiver or trustee in bankruptcy, who has the right to dispose of the bankrupt's assets. The receiver can control how much income a bankrupt is allowed.

Borrowing and using credit cards are out. But there is evidence that more people are willing to live with such restrictions, in return for not repaying a large debt.

General Krulak says: "There will be unintended consequences from the change in the law." If banks and other lenders decide they are not going to be able to reclaim debts, even partially, then they may be more reluctant to lend. MBNA already refuses 60 per cent of applications for cards that it receives.

MBNA and other credit card issuers try to protect themselves by charging higher interest rates to borrowers they regard as riskier. But that can merely make a bad risk's financial position worse.

Last week, Wilkins Kennedy, the insolvency specialist, warned students against bank-ruptcy as a way of escaping repaying loans, because of the long-term effect on their credit rating. But General Krulak refers to the record levels of bankruptcy in England and Wales, when consumer debts are soaring, and says this shows people were anticipating the legal change.

The Department of Trade and Industry says in the last three months of 2003, a total of 10,271 personal insolvencies were registered, an increase of 28.9 per cent on the similar period in 2002.