Is it too expensive to go bankrupt?

In the second quarter of this year, 27,390 people in England and Wales legally declared they were unable to pay their debts – a fall of 10.2% compared with the same period last year.

It sounds positive, but the headline figures only tell half the story.

What the numbers tell us

Out of that number, there were 8,088 bankruptcies in total, down 27.1% on 2011. Bankruptcy can be applied for by paying a fee of £700 and, if granted, will write off debts you’re unable to repay, usually within a year.

The number of Individual Voluntary Arrangements (IVAs) was also down 6.6% to 11,346. IVAs are aimed at those with debts of more than £15,000, and are often described as ‘bankruptcy light’. IVAs usually last longer but, like bankruptcy, unaffordable debt is usually written off.

Finally, and most importantly, the number of Debt Relief Orders (DRO) rose 9.6% to 7,956 in this period. DRO are aimed at low-income consumers with debts less than £15,000, and are usually cheaper than bankruptcy.

Yet, you can’t apply for a DRO if you have more than £50 a month income left after you’ve paid your living costs, or if you have total assets of over £300 (but not your car if it’s worth under £1,000). These requirements rule out a huge number of people with modest assets who are struggling to meet their debts. So why aren’t bankruptcy numbers rocketing too?

Priced out of bankruptcy?

It might be that lenders are giving struggling customers a bit of breathing space. However, I fear that the costs involved in declaring oneself bankrupt may also be playing a role.

In England and Wales, bankruptcy usually costs £700 (or £525 for those on low incomes). This is made up of a £175 court fee and £525 payable to the official receiver. The receiver’s fee has increased significantly by 46% in the past two years.

For those considering bankruptcy, I wonder how many of them would have £700 to hand. In Scotland, bankruptcy (known as sequestration) only costs £200 and bankruptcy figures there have been rising, not falling like those in England and Wales. Is it because it’s cheaper?

My worry is that the £700 upfront fee you have to pay to declare yourself bankrupt is driving some towards alternatives like debt management plans, which can drag on for years, costing you huge amounts in fees without fixing the core debt problem.

Bankruptcy isn’t a good profit-earner for fee-charging debt management companies in the way that debt management plans and IVAs are. At the less-scrupulous end of the debt management market, how many people are being steered towards these alternatives and away from bankruptcy? It’s difficult to say as debt management plan totals aren’t published in the official debt statistics.

It would be a real shame if the ‘squeezed middle’ is priced out of bankruptcy just for the sake of the upfront fee. Particularly if they end up in the grips of a fee-charging debt firm offering a potentially inappropriate alternative that costs them much more over the longer term.