Published in Debt Advice Features on Saturday, February 03 2007

Bankruptcy statistics over the last few years have risen dramatically and is set increase further into 2007 with an estimated figure of 100,000 of us going to take the bankruptcy route in 2007
Why is this happening?

Some are saying that the increase in bankruptcies; is down to the change in the Insolvency Law through the Enterprise Act, which makes bankruptcy seem like a really easy route to take.

Others are claiming that the dramatic increase in bankruptcies, are down to the less strict laws on lending and increasing interest rates.

Others claim that its the people who stretch themselves too much, borrowing more and more, which will eventually force them into making a decision that is not good for them or their creditors, such as bankruptcy.

Well bankruptcy is quite a simple process and it does write off the majority if not all of your unsecured debt outstanding, a person would normally only pay what they can afford for a maximum of 3 years, normally they would be out of bankruptcy after 12 months, all this is true and sounds that simple, however there are many, many restrictions in bankruptcy and not the normal ones that are published in the Insolvency Service’s “Guide to Bankruptcy”.

The big conversation surrounding bankruptcy is about whom is to blame for the increasing number of people petitioning for bankruptcy in England and Wales so the big question is:-
Where does the blame lie? Is it the people, the creditors or the government and the Enterprise Act? Here are some articles about each.

The People

We live in a society where the ever ready use of credit is normality and we don’t think twice about going to the petrol station, supermarket and corner shop using our credit card to pay for these types of goods. The society we live in is a gadget, gismo and technology dominated era, everyone trying to keep up with the latest trend and have the nicest things and credit is available for almost everything you buy.

Many of us obtain credit from a very young age namely 18 years old, with the lack of education on money management, debt and the like, many of us get our first credit card when the leaflet from the bank or other financial institute comes through the post on our 18th birthday, we then start using this credit card openly and freely without the hindsight of where things could eventually lead us.

We then hit the limit on the credit card, we are offered 0% balance transfers, or consolidate the debt into a loan, not realising again where this could possibly lead us, after years of switching debt between debt, eventually we will fall short, where would we turn, we try the banks and the creditors without no assistance being offered, we have to look elsewhere for assistance and if the help or advice doesn’t come the debt can spiral and mount, missing payments, getting hassle from creditors who rightly contact us wondering why they are not getting any money back for the money they so kindly lent to us? Ultimately before too long we are burrowing our heads in the sand, hiding away, ignoring the phone, too scared to discuss our problem with the people to whom we owe the money to.

In reality of the money was borrowed in the first place, we applied for the money we probably bought nice clothes, good holidays, possibly purchased nice items like cars, computers, TVs etc. We have enjoyed the money for a short time, but then when the debt starts kicking in and increases along with the repayments, we instinctively think to borrow more debt to cover old debt, which ultimately seems the best way, but when it keeps growing and growing are we still enjoying it?

A part of the problem does lie with us the mind set and the way we use credit, this is not put down to any given individual but the underlying problem is the lack of education, in schools we learn about key areas such as Science, Maths, English, etc. What about “Money Management” Or “Understanding Debt?”

The Creditors?

The reason why many people blame the creditors is down to the fact that they have lent money when clearly someone was not in the position to support the debt in the first place, however it can be seen that due to the amount of money potentially that could be made through the interest, charges etc, the potential profits completely outweigh the risk of never getting the money back.

Many of the financial institutes process 1000s of unsecured credit applications a day, a certain percentage of these when successful are probably written off before the money has gone out to the person. The profits in this industry are huge and large well known banks earn billions of pounds clear profit year in year out. Is the level of bankruptcies really affecting them as much as they claim?

A lot of the debt that has ended up in bankruptcy, the people who fall into difficulty because of their financial obligations, some of it could be put down to irresponsible lending on the finance companies part.

The government are looking upon the creditors to tighten their lending criteria and qualifying process, it has been seen on a TV documentary that a person who was classed as disabled and in receipt of the relevant benefits, no income other than benefits had managed to obtain credit totalling £100,000, this led to an investigation and the debt being written off.
In truth are the creditors to blame, are we going to blame the creditors for the way the offer money to people.

Should we be focusing on the way they do not offer any real assistance when a person who owes the money and is starting have serious difficulty, there is no contingency for the creditors to help, assist or advise them on how their clients could deal with the debt.

The problem does not lie with the way the creditors lend the money and them thinking the profits of lending outweighs the risk of losing the money, the problem is that the majority of bankruptcies happen due to the individual either falling into extreme difficulty due to a dramatic change in circumstances and then honestly trying to get help from their creditors but no assistance is readily available, or someone falls into difficulty and is then hounded day and night by the creditors chasing the money up and scaring people into taking action against the debt that does not actively include the creditors getting any money back, namely pushing their clients into bankruptcy.

The Government and Enterprise Act

The Enterprise Act brought about changes to the insolvency law in England and Wales that made the bankruptcy procedure seem easier that what is originally was.

They set about reducing the term of bankruptcy, giving automatic discharge after 1 year instead of 3 years; this is great and seems an easy way out for people who where there is no hope that they could ever repay their debts.

The main reason behind the change is so that people who have been unavoidably forced into bankruptcy through genuine reasons are given a better chance to start again. The position is different for people who have been bankrupt more than once in the previous 15 years when the new law came into force in April 2004.

Bankruptcy Restriction Orders are now a big factor in the new laws, they determine that anyone found to have been fraudulent in anyway or they are to blame for their conduct leading up to bankruptcy or can be to blame for the position they are in or that the bankruptcy can be linked to criminal bankruptcy then the individual will find themselves being subject to bankruptcy for a period of 2 to 15 years.

All this is well and good, but does the thought of having a Bankruptcy Restriction Order being imposed on them really deter people from taking the bankruptcy route, or is that the lack of knowledge of Bankruptcy Restriction Orders doesn’t deter people from it or could it be that the risk behind these sort of restrictions being imposed on a person, is worth taking to get out of what already is a desperate situation?

Did the Government actively seek to deal with the ever increase in unsecured debt by introducing the law, and making the law intentionally easy for people to take the bankruptcy route, effectively reducing the overall debt in England and Wales?

However one thing is for sure the Government would prefer people to pay as much back as they can over a fixed term, and would encourage the creditors to be more lenient and more in favour of Individual Voluntary Arrangements, could we see the future of dealing with debt being in the type of arrangements, IVAs, SIVAs, FTVAs.

Conclusion

The answer is no-one specifically is to blame for the increase in bankruptcies in England and Wales. We should see a dramatic to change to the insolvency procedure and debt solutions over the coming years, whether that is a direct change to lending laws, or the bankruptcy procedure, or a more realistic way of dealing with unmanageable debt.

The main thing is that regardless of your situation you should always be able to find advice, is bankruptcy the right route for you, remember get advice.