Get help with your debts: jumping off the edge into bankruptcy is not an easy option

Sam Dunn finds a sting in the tail of the new rules on personal insolvency

What started as a piece of legislation designed to give entrepreneurs a second chance has ended up raising the spectre of thousands of consumers filing for bankruptcy to wipe out record personal debts.

What started as a piece of legislation designed to give entrepreneurs a second chance has ended up raising the spectre of thousands of consumers filing for bankruptcy to wipe out record personal debts.

There is concern that the new Enterprise Act, to be introduced on 1 April, will change attitudes to bankruptcy. Since it allows people to jettison such status after just 12 months or possibly less - instead of the current two to three years - the fear is that more consumers will turn to the courts to escape their debts.

As interest rates edged up another quarter of a per cent two weeks ago, figures from the Department of Trade and Industry revealed that the number of personal insolvencies in England and Wales rose by a fifth last year to 36,328 - the highest level since 1993. Students have exacerbated the problem. The number filing for bankruptcy to write off undergraduate loans soared to 899 in 2003 from 276 in 2002. The Government's Higher Education Bill will close this loophole.

But the apparent easing of the path out of bankruptcy offered by the Enterprise Act is not the soft option it sounds: it is accompanied by punitive measures. Under the Act, where there is evidence that consumers have acted irresponsibly, this will be met with a bankruptcy restriction order (BRO) curbing their financial affairs for up to 15 years.

"If [consumers] have been reckless in the way they ran up debt on credit cards, without any intention of paying it back and then filing for bankruptcy, they will be subject to a BRO," warns Charles Turner, insolvency partner at accountants PricewaterhouseCoopers. "Your mortgage, bank account and job could all be affected."

Crippling debts are not the only cause of bankruptcy: in some circumstances, quite small sums can force people into a corner where payments can't be met. "For some with debts of £10,000, losing your job with no way of paying your loans back can lead to bankruptcy," adds Mr Turner.

Debt Free Direct tries to draw up rescue plans such as individual voluntary arrange- ments (IVAs), where a fixed monthly sum is paid to creditors for five years. Bank- ruptcy is seen by the firm as a last resort.

Debt Free Direct's chief executive, Andrew Redmond, says most people who seek help owe at least £27,000 but that just 5 per cent actually go bankrupt. "The changes [in the law] could mislead people into thinking bankruptcy is an easy option. They must not forget they can lose their house. For the vast majority, there are better options."

These include a debt management plan drawn up by the Consumer Credit Counselling Service (CCCS), a consolidation loan or an IVA. "If you have no big assets, little income and you rent your property, bankruptcy is then the last option," adds Mr Redmond.

Taking the "easy option" of personal insolvency will also affect you in other, more immediate, ways. For a start, from 1 April it will cost you £450 to file an obligatory county court form stating that you are bankrupt. And your credit reference - vital for opening a bank account or obtaining a mortgage - will be marked for six years. You are also likely to be charged higher rates of interest.

Everything you own, except basic items such as clothing and furniture or tools for your job, is surrendered to the court to pay off your debts and you may even be asked to cash in a life insurance policy. An income payments order (IPO) could see a chunk of your monthly salary go towards paying off your creditors, although a court will not insist on this if it means you cannot look after your family.

You can lose your home but this can be delayed for at least a year to enable you to make other living arrangements. Expect unwelcome publicity too: your details will appear in The London Gazette, a daily journal for the credit industry, and in your local paper.

At the end of the bank- ruptcy period, your debts will be written off. Only then can you make a fresh start, though one that may possibly be under the cloud of a BRO.

Bankruptcy is by no means the easy way out, so seek help and explore all the other avenues first.

www.insolvency.gov.uk; www.cccs.co.uk