In 2004, one of the rules of bankruptcy changed, enabling a person to be discharged from bankruptcy after just one year rather than three. The rule was amended to allow business people to start again financially, but it also meant that individuals could use this ruling to their advantage.
This amendment has led to much criticism of the bankruptcy rules and it has been suggested that bankruptcy is a route that is now too easy to follow, with few repercussions for people who have allowed debts to spiral irresponsibly.
Research has shown that more than half the population of the UK believe that one year as a bankrupt is not long enough and too many people are taking the ‘easy’ way out of debt.
So, is declaring bankruptcy really an easy route to take?
Declaring yourself bankrupt may result in the following consequences:
- Having to give up any assets of value, plus all debit and credit cards
- Losing financial interest in any property owned
- Losing a job, if the employment contract does not allow bankruptcy
- Any disposable income being used to pay off debt, potentially for several years
- Bankrupt’s credit rating will be severely damaged
When viewed under these circumstances, bankruptcy does not seem such an easy route to take. Total control of a bankrupt’s finances is handed over to either the Official Receiver or a professional insolvency practitioner, whose priorities lie with those who are owed money. Depending on the total value of assets, either the Official Receiver, who is an official of the bankruptcy court, or an insolvency expert will decide which assets are to be sold in order to raise money for creditors.
Many people think that bankruptcy is too easy for people who have become bankrupt through reckless spending. Suggestions have been made that the system should differentiate to a greater degree between individuals who have spent recklessly and those who have declared themselves bankrupt following genuine financial hardship. In particular, cases where celebrities have declared themselves bankrupt have inspired criticism of the rules and regulations.
Compared with other debt management solutions, bankruptcy may be a cheaper and quicker option to deal with debt. However, this depends greatly on the personal circumstances of each individual.
The fact that bankruptcy is announced publicly in the London Gazette and the Individual Insolvency Register can dissuade people from following this route. Even with the prevalence of debt in today’s society, there is still a social stigma attached to declaring yourself bankrupt and many people try to hide the fact from family and friends.
For members of the general public, deciding to declare themselves bankrupt remains a huge life event and for the vast majority of people this decision is not taken lightly. There are repercussions for more than the year it takes to be discharged, as a note of the bankruptcy remains on an individual’s credit file for six years. This means that a person will find it difficult to obtain any type of borrowing for that time, which may hinder his overall financial recovery.