Bankruptcy: it can be murder

Imagine having no control over your cash or your home and being denied a mortgage, credit cards or even a bank account.

Bankruptcy can mean just that, but it has not stopped more people than ever from opting for this route as the solution to their debt problems. The ranks of bankrupts are being swelled by borrowers pushed to the edge by their mortgages, insurmountable credit and store card debts or, increasingly, crippling student debts.

The Department of Trade and Industry says that in the final three months of last year, 10,271 individuals in England and Wales became insolvent, 29 per cent up on the same period in 2002 and the highest figure since 1993, when the recession hit workers' finances hard.

Some experts think the figures could get even worse over the coming months. Mike Gerrard, personal insolvency specialist at accountant Grant Thornton, says: 'For the short term, things are going to get worse before they get better. Over the next few months, we are certain to witness sustained levels of individual insolvencies, as higher mortgage repayments, following increases in the Bank of England base rate, will contribute to plunge many more on the brink of insolvency into bankruptcy.'

On top of increasing mortgage repayments, Gerrard believes the biggest problem is spiralling credit card debt. 'Typically, an individual with serious debts will have a mortgage in the region of £50,000 to £100,000 and credit and store card debts of £50,000. While a quarter or even half a point increase on mortgage repayments will have an impact, paying 20 to 30 per cent interest on debts of £50,000 is what can cause the biggest problems,' he says.

The Department for Education and Skills says the number of students writing off student loan debts by declaring themselves bankrupt more than tripled in 2003.

Nearly 900 students and graduates felt the best solution to debt was becoming insolvent last year, compared with 276 in 2002. This is a small proportion of the student population, but worrying nonetheless. Why can bankruptcy, which not only entails handing over control of your financial life, but often the more emotive stigma of financial exclusion, seem attractive?

If you have been struggling with overwhelming debts for years which could well have had a detrimental effect on your career, your health and your relationships, then the idea of drawing a line under these can sound tempting.

Bankruptcy cancels most kinds of debts so you can make a fresh start and ensures your assets are shared out fairly among your creditors.

For students, there has also been the added bonus that, currently, student loans are included in the debts wiped off if they opt for bankruptcy, though this is set to end in September through a change in the Higher Education Bill.

However, bankruptcy entails giving an Official Receiver - the individual responsible for overseeing your insolvency - a full list of your assets and details of your creditors and what you owe them. Bankrupts must hand over the majority of their assets together with all their records, bank statements, insurance policies and other papers relating to their property and financial affairs.

If you own your home you run a serious risk of losing it - unless your dependants live there. You must stop using your bank, building society, credit card and similar accounts and may also have to undergo a court appearance to explain why you are in debt.

Adding to the humiliation is the announcement of your bankruptcy in the London Gazette newspaper and, possibly, your local paper.

Insolvents are only permitted to keep possessions such as work-related tools, books, vehicles and other items of equipment needed for employment, plus clothing, bedding, furniture, and household equipment.

Everything else goes to the receiver, who will then dispose of it on your behalf and use the cash generated to pay the fees, costs and expenses of the bankruptcy and then your creditors.

Anything you obtain, or which passes to you, for example through an inheritance - whether it is property, cash or a family heir loom - can be treated in the same way.

Usually after three years, your bankruptcy will be 'discharged' and you can start to build a financially normal life again, though it is worth noting that provisions in the Enterprise Act will reduce the time before debtors are discharged from bankruptcy from three years to one from next month.

Even after their discharge, former bankrupts are likely to have trouble getting a credit card or a mortgage. If they are able to get credit at all, it may be at a higher rate than standard customers.

That said, Frances Walker, of debt charity the Consumer Credit Counselling Service, says bankruptcy can be right for some people - for example, those without many assets, such as an elderly couple living in a council-owned home and unlikely to need credit in the near future.

However, any person considering bankruptcy should think seriously about the raft of consequences before going ahead.

Walker says: 'It is not a case of walking away from outstanding debts and rubbing your hands with glee; there are lots of implications.'

She feels that for young people the consequences can be particularly tough; it may well affect their employability, particularly if they had hoped for careers in banking or financial services. Also, although new rules will allow discharges after one year, a bankruptcy remains on your credit files for six years.

She says: 'As a young person, you are likely to find it very difficult to exist without any credit. Also, in terms of your housing situation, trying to get rented accommodation can sometimes require a banker's reference. Notifying landlords of bankruptcy is likely seriously to hamper your efforts to find accommodation.

'All in all, bankruptcy is not a good start for young graduates.'

For more financially established debtors, Gerrard says: 'If you have assets, such as a lot of equity in a property, then bankruptcy is less likely to be the best course of action.

'It is also worth bearing in mind that even if you are discharged after a year, you could still stand to lose part of your income if the receiver deems it to be surplus to your basic requirements.'

In short, bankruptcy is not an easy way out of debt problems and all the alternatives (such as an individual voluntary arrangement, which is a flexible procedure where a debtor makes an offer to their creditors with the help of a professional debt counsellor or specialist accountant) should be looked at before you start bankruptcy procedures.

If you are drowning in debt, take all the free expert advice available from the CCCS, National Debtline and Citizens' Advice.

· For a comprehensive guide on the legal ins and outs of bankruptcy call the Insolvency Service on 020 7291 6895 or visit www.insolvency.gov.uk

Contacts

Consumer Credit Counselling Service 0800 138 1111
National Debtline 0808 8084000
Grant Thornton 0117 926 8901