Credit Crunch Pushes More Consumers Into Bankruptcy

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Personal debt experts, MoneySolve fear for the future as bankruptcy applications reach record numbers. Predictions of an impending crisis aim to warn consumers who think bankruptcy is an easy way out. However it can have some far reaching consequences that may make the average person think twice before applying for one.

For every consumer that declares their bankruptcy, there's someone else who finds alternative means to address their debt.

MoneySolve has seen bankruptcy applications steadily rise in the last few years but in the first quarter in 2008 they saw an unprecedented rise in the number of bankruptcies being issued. Difficulty in getting credit and a rise in interest payments mean that consumers are unable to meet their debt repayments.

Insolvencies were up 1.7% to over 25,000 based on figures from the previous quarter. By the end of 2008, more records are set to be broken as the number of bankruptcies is expected to reach 130,000. Consumer debt is expected to reach £1.5 trillion by 2009. The situation seems to be a lot worse than the official figures show. An industry insider recently said, "For every consumer that declares their bankruptcy, there's someone else who finds alternative means to address their debt." They added, "The credit crunch is going to continue making this situation worse."

Compared to figures from the same period in 2007, the number of insolvencies is down. This is attributed to an increase in IVAs or Individual Voluntary Arrangements. These were marketed as an alternative to bankruptcy, allowing debtors to write off a certain portion of their debt.

This drop in the number of insolvencies is expected to be temporary as banks have recently made it more difficult to apply for an IVA. We can expect to see a number of alternatives to bankruptcy in the coming year that will provide debt solutions without the stigma associated with bankruptcy.

In contrast to the difficulty in acquiring an IVA, applying for bankruptcy is now easier than ever but is it really the right decision? Is it the only way to solve debt problems ? What are the consequences of bankruptcy? There are a number of factors to think about before considering bankruptcy. Good debt advice from a reputable debt management company is recommended before making such an important decision.

The procedure for becoming bankrupt has become very straightforward and is seen by many as an easy way out of debt. All that is needed to be declared bankrupt is to:

  •     Complete declaration forms available from local county courts.
  •     Provide details of all assets owned and all debts owed.
  •     Pay the associated court fee and administration deposit.

The declaration can be processed immediately and the debtor can be declared bankrupt the same day.

Following this, the debtor will be issued with a Bankruptcy Order. They will then be required to meet their local Official Receiver. The role of the Official Receiver is to review the circumstances and causes of the bankruptcy and to ensure the debtor adheres to the conditions of the bankruptcy. This will involve discussing the amounts and types of debt that are owed. Once this is done the debtor will be unable to acquire any other kind of debt solution, for example an IVA, debt management or consolidation loans.

The duration of bankruptcy usually lasts one year. In 2004 this was reduced from three years. Once the bankrupt is discharged from their bankruptcy they are able to start again debt free.

This all sounds easy and it is understandable why many debtors consider bankruptcy as a solution to their debt problem. However the negative, long lasting consequences of bankruptcy need to be considered as they can have a lasting impact on the debtor and their family.


The trustee associated with the debtor's bankruptcy has three years to deal with any property owned by the debtor. During these three years the trustee can:

  •     Sell their property
  •     Have a charging order issued. This means that any money generated by the property, through rent or sale, will got to the trustee.
  •     Arrange terms for the debtor to buy the trustee's interest in the property. These terms can be arranged with those with whom the debtor shares ownership of the property.

Bankruptcy terms usually last one year. However they are at risk of further action, in terms of assets, for a further two years. Many people forget that after the expiration of their bankruptcy order, their home, or their share of it, remains in the hands of the trustee.

At worst this can mean their house is sold regardless of their bankruptcy status. The consequences of this can be devastating for the debtor's family family. As mentioned above, this can also be the case if they own a share in a property.

Bankruptcy Restriction Order (BRO)

A BRO is an extension of a Bankruptcy Order that can be imposed on the debtor at the end of the bankruptcy terms, which is usually one year. A BRO is issued if the Official Receiver deems that the debtor has been irresponsible during the terms of their bankruptcy.

Examples of irresponsible behaviour could be:

  •     Gaining more debt during their bankruptcy period.
  •     Gaining more debt with the intention of applying for bankruptcy.
  •     Selling assets and giving the money to family members.

Consequences of a BRO

  •     The person cannot be a director of a company.
  •     Creditors must be made aware of the debtor's bankruptcy status if they apply for credit for more than £500.
  •     Any trading partners must be told about past bankruptcy including the trading name used when declared bankrupt.
  •     These restrictions can last between 2 and 15 years.

The relative ease that is associated with applying for bankruptcy may be related to the rise in insolvencies in the first quarter of 2008. Initially bankruptcy may seem like an easy way to get out of debt. However complications can, and do, arise from this kind of debt solution. Will the result of bankruptcy be worse than the debt? This all depends on the personal circumstances of the debtor. Careful consideration and advice from a debt management company is needed before a decision of this magnitude is taken. As the credit crunch continues to effect consumers and economies worldwide, this situation is expected to continue to worsen.


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Andrew Heaps

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