Going for broke

By HELEN LOVELESS, MAIL ON SUNDAY ENTERPRISE EDITOR
Updated:

 

PERSONAL bankruptcy levels could soar when new laws come into force early next year, an expert has warned.

Financial and business advisers Grant Thornton believe the introduction of the Enterprise Act 2003 could encourage more people with debts to declare themselves bankrupt, by making it easier for them to do so.

Currently, individuals who declare themselves bankrupt must wait three years before the bankruptcy is discharged. Under the new laws, from April 2004 this will be reduced to one year or even less.

Trustees will also have only three years after someone has declared bankruptcy in which to stake a claim on any remaining assets. At present, there is no limit. The changes will give people added protection over their assets, including their home.

But Malcolm Shierson of Grant Thornton is concerned the new rules will also give people the 'wrong message' about bankruptcy, which could lead to severe financial problems in the future.

'The message here seems to be that declaring bankruptcy is increasingly simple and painless, which is not the case. There is a danger the laws will encourage people to overspend, knowing there is an easy exit for them in due course,' he says.

'We already have record levels of debt in this country, with around 75 people going bankrupt every day. It is only going to get worse if people believe it is easy to wipe the slate clean after the event.'

There are many drawbacks to declaring yourself bankrupt, aside from the stigma. Undischarged bankrupts are unable to borrow more than £250 or be a director of a limited company, which can make starting again very difficult.

And although your bankruptcy may be discharged within a year, your actual credit rating could be affected for around five or six years, says Shierson. This could mean being turned down for mortgages, loans, credit cards and even savings accounts.

An alternative option is to set up an Individual Voluntary Arrangement (IVA). This is an agreement between the person with the debt and the creditor, to repay a percentage of the money over a set period of time. In many cases the sum paid overall will be less than the actual debt.

IVAs will normally prove a better option than declaring bankruptcy, as long as you have a regular income and can meet the payments. However, you have to make a financial commitment and stick to it.

Before deciding whether to declare yourself bankrupt, seek advice from Citizens Advice or the Bankruptcy Advisory Service (01482 633 035). It charges a one-off £20 fee for as much advice and help as you need.

Avoid paying debt management companies. You'll have to them as well as your debts. There are companies providing the same service free of charge, such as Payplan (0800 716 239), and the Consumer Credit Counselling Service (0800 138 1111).

• Check out our guide on how to deal with bankruptcy.

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