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Is it too expensive to go bankrupt?

The number of people going bankrupt in England and Wales has plummeted recently. It sounds like good news, but could it be because people can’t afford the £700 fee?

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.

Comments
Guest
Leigh says:
11 August 2012

This article is written as though bancruptcy is a quick-fix solution and a person’s right, rather than being a way for the feckless to get out of paying their debts whilst the rest of us struggle to do the right thing. It appears that it is perfectly acceptable for someone to live a lifestyle that is way beyond their means, and then to go bancrupt with no consideration for the small businesses and individuals who sold to them in good faith and are left to struggle to pay their own bills and feed their families – through no fault of their own. Until people start to live within their means and accept that a 52″ TV and foreign holidays are not basic essentials then we will never get out of this financial mess.

Guest
FINSBURYPARKER says:
27 August 2012

Until people start to live within their means and accept that a 52″ TV and foreign holidays are not basic essentials then we will never get out of this financial mess.
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Yup!….They should build a new ‘Newgate’ Debtors Prison,….That’ll larn em!

Guest
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2 March 2013

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Guest
Giants Seat says:
24 May 2016

How on earth can some of these contributors over generalise : jumping to conclusions that the individual was a reckless live for today spender. Been there done it had the T shirt : and best to say little if uninformed. Stand in the shoes of someone who’s personal life and everything hit the bottom. This is a good article.

Guest
dieseltaylor says:
24 May 2016

An interesting insight. There are “good” bankrupts and “bad” bankrupts and it is unwise to tar them with the same brush. This seems the stuff that Citizens Advice Bureau’s are so good on.
citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy-2/

Please note, if you do a search, how many adverts Google puts in to confuse the unwary into going to a commercila firm.

It would be nice to know if the author is Which? staff or a specialist in finance and debt.