Debt relief orders and individual voluntary arrangements – the number of both of these emergency debt management measures rose last year as consumers grappled with the realities of personal borrowing levels that are starting to look a lot like they did before the last financial crash.
It does mean that levels of personal bankruptcy are falling though, as debtors look for alternative solutions to this end-of-the-line action.
But now steps have been taken to make bankruptcy easier than ever before, leaving concerns in their wake about the risks of blasé borrowing across a whole new generation of consumers.
Easier insolvency
Until recently, if a debtor wanted to petition for bankruptcy they would need to attend their local county court, complete a petition, fill out forms in triplicate and then appear before a judge. They would also need to pay a large fee upfront.
However, this was reformed last year and now struggling debtors can simply apply online. They can also opt to pay the £680 fee by instalments, making bankruptcy more affordable than in the past.
Something that is likely to make an even bigger difference is that would-be bankrupts no longer have to appear in person before a judge; instead their application is dealt with by an adjudicator working for the Insolvency Service.
Safety barriers
Some critics of the new system expressed concern that it would make bankruptcy too easy to achieve or even that without the scrutiny of a judge it would be easy for malicious fraudsters to disrupt people’s finances.
However, Simon Underwood, partner and business recovery specialist at accountancy firm, Menzies LLP, says those concerns have proved unfounded: “When the system first moved online, concerns were voiced that it could lead to an increase in fraudulent activity or result in more people becoming bankrupt without access to advice.
“While these were reasonable concerns to have, neither has proved to be a problem. The online method of filing for bankruptcy has been beneficial for users and the court system. For those in financial distress, the ability to file for bankruptcy online is much easier and less stressful than having to wait for weeks to attend a court hearing. This can make a massive difference to the individual’s wellbeing; minimising any disruption to their personal lives and helping them to move on more quickly.
“The online method has also helped to take pressure off the court system.”
Stress-busting
What’s more, the benefits of the simplified application system go beyond reducing demand for court time or allowing bankrupts to stagger the cost. They also reduce the potential impact on the applicant’s mental health. Debt is a well-known trigger for anxiety and depression, and in the past the process of applying for bankruptcy was potentially very stressful.
Stephen Young, restructuring and insolvency lawyer at Keystone Law, says: “What the reforms have done is to make the process of applying for your own bankruptcy more efficient and user friendly.
“Under the old regime, it was necessary for the debtor to fill out a number of paper forms in triplicate. In addition, the court fee also had to be paid in one go [in cash] which itself is difficult if you are in financial difficulty.
“People who find themselves having to consider bankruptcy are quite likely to be quite anxious and quite possibly suffering from stress. Removing the need to physically attend court will go some way to alleviate that, given attending court itself can be intimidating. In addition, making it now an online procedure with no paper forms and giving a debtor the opportunity to pay the court fee by instalments is a help.”
Bankruptcy myths
For some struggling debtors, particularly those who do not have much in the way of assets like a house, bankruptcy may be the best option for their money worries.
While the process may have been simplified, there are a number of persistent myths surrounding bankruptcy that may still put people off even when it is an appropriate option for their problem debt.
For example, many people believe that if they go bankrupt they will be featured in their local newspaper, but this is no longer the case unless it’s an exceptional situation. Also, it’s a common misconception that bankruptcy lasts forever, when in fact most bankrupts are discharged after 12 months.
In the past, bankrupts have struggled to find banks that will allow them to open accounts, but this has changed. Many high street banks now offer basic banking facilities even before the bankruptcy is discharged.
However, while bankruptcy may not be as devastating as some of the myths suggest, it does remain a serious financial event that affects a person’s life for many years.
Joseph Green, consumer affairs manager at credit reference agency Experian, says: “A bankruptcy order shows on your credit report for a minimum of six years from the date of bankruptcy order. During this period, a number of restrictions apply that you need to be aware of.
“For example, you are legally bound to tell a lender you are bankrupt if you are applying for credit of more than £500, which means you might struggle to obtain credit during the bankruptcy period. Even after this period, organisations may refuse to give you credit or other financial services simply because you have been bankrupt in the past. Most bankruptcies are discharged within the first year, which means you are released from any debts covered by your bankruptcy.”
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