Debtors Are Going For Broke

Record numbers of consumers are declaring themselves bankrupt to escape having to repay vast personal loans and debts racked up on credit cards and store cards.

Last year 36,000 people declared themselves bankrupt

The Department of Trade and Industry published shocking new figures that lay bare how people are struggling to repay a £1,000bn debt mountain.

In the third quarter of last year, there were 17,562 individual insolvencies, an 11.6 per cent increase on the previous quarter and a 46 per cent increase on the same period last year.

Last year, 36,000 declared themselves bankrupt. Insolvency experts believe that this figure could top 50,000 this year.

That would vastly exceed the totals reached in recessions of the past. For example, in the brutal recession of 1992, 36,794 people declared themselves bankrupt.

There has also been a significant shift in the causes of these bankruptcies. In the late 1990s 60 per cent of all bankruptcies concerned a failed business. Now, 60 per cent of all bankruptcies are caused by consumer debt.

Many insolvency experts believe that the Government's changes to the bankruptcy rules have exacerbated this situation.

Much of the sting of bankruptcy was removed in the 2002 Enterprise Act, which became effective from April 2004.

The new rules allowed people to have their debts discharged after one year rather than three. This means that after this period any income the bankrupt receives does not have to be repaid to creditors. In reality KPMG says 51 per cent of bankrupts are discharged after just eight months.

These changes were supposed to help failed entrepreneurs get back on their feet quickly if their business collapsed. But it is cash-strapped consumers who have been the main beneficiaries.

"The Government has created a system which has removed the stigma of bankruptcy," says Mark Sands, the head of personal insolvency at KPMG. "It has become so much easier. A culture encouraging bankruptcy is spreading in pubs by word of mouth."

Numerous celebrities have been declared bankrupt. They include George Best, the ailing footballer; Gary Glitter, the disgraced rock star; Clarissa Dickson Wright, the TV chef; and Kevin Maxwell.

Declaring oneself bankrupt normally takes no longer than 48 hours. Applicants fill in a petition which can be downloaded from the Department of Trade and Industry's website www.insolvency.gov.uk.

The applicant then takes the form to the High Court or to the local County Court, where a judge will make the bankruptcy order.

The court appearance, which normally lasts less than 15 minutes, is usually arranged on the same day as the application is made. A fee will be charged by the court. This is £467.

But although the process is quick, it is not necessarily painless.

Creditors can seize most of a person's assets. This will include any savings, investments, plus the equity in the family home.

Bankrupts, who in the past have included the former MP Neil Hamilton, can also be forced to sell their homes and possessions to raise funds for the creditors.

The only personal things you are allowed to keep are your clothing, furniture, and bedding.

You may also keep any tools, vehicles and books necessary to your employment.

If you are married, your spouse's assets can also be taken and any business assets will also be seized.

The only asset a bankrupt can keep is a company or private pension entitlements. However, you may be forced to give up any bonus payments made into a pension scheme shortly before you petitioned for bankruptcy.

Once someone has been made bankrupt they cannot seek credit of more than £250 without disclosing that they are a bankrupt. A bankrupt cannot manage a limited company or act as a director without a court's permission.

A bankrupt is also forbidden from holding certain positions in public life - he or she cannot be an MP, JP, school governor or the trustee of a charity or a pension fund.

The Government has recently closed a loophole that was being exploited by hundreds of graduates to avoid paying back thousands of pounds of student debt.

Many students simply chose to bankrupt themselves upon leaving university. As most had few other assets to seize, this in effect allowed them to walk away from their debts.

As a result, student loans are now exempt from bankruptcy legislation.

However, a recent graduate could conceivably still pay off a student loan with a credit card or personal loan then declare themselves bankrupt and wipe out their student debt.

However, not everyone agrees that the steep rise in bankruptcies is the result of legislative change alone. "We don't think the legal changes have had that much affect," says Vicky Redwood, a UK economist at Capital Economics.

"Bankruptcies have been rising for three years - well before the law changed. The new regime only applies in England and Wales, and yet we've seen a strong surge of insolvencies in Scotland too."

Out-of-control spending appears to be one big reason. But bankruptcy is not the only option for people struggling with debt.

Instead many are opting to make an individual voluntary arrangement instead. This is a legally binding deal made between a debtor and his or her creditors.

Normally, a large proportion of the debts - typically half - are erased, but the debtor is then obliged to make monthly payments to their creditors for a number of years, typically five.

Sands says such arrangements offer a more positive and proactive option that gives individuals greater control over their financial future.

He adds that they "are also popular with creditors . . . they know they've got a better chance of getting some of their money when they might have thought they would have to write it all off as bad debt."

Such voluntary arrangements may well become the future of how indebted consumers cope with financial crisis. In the third quarter of this year, there were 5,519 arrangements, up 95 per cent on the same period last year.