'Online bankruptcy' plans widely condemned

Posted in 'Dealing with Debt' by Richard Catlin

05 March 2010

Government proposals to make it easier, faster and cheaper to file for bankruptcy have met with heavy criticism.

Record numbers of UK consumers were declared bankrupt in 2009, some 134,000, and the Government has now set up a consultation to look at ways of streamlining the process of applying for insolvency. There are two main reasons - to reduce the strain on the courts and to remove the psychological barrier associated with attending court to file for bankruptcy in the first place.

The £510 that bankruptcy currently costs (it’s increasing to £600 from next month) is broken down between £350 to manage the process itself and £160 in court fees. For people in real financially difficulty, this outlay often proves to be out of reach. Chopping out or reducing the court fee could help affordability.

Concerns have already been voiced about the new proposals. Firstly, by moving bankruptcy petitions online, it removes the opportunity for a face-to-face review to determine whether it is actually the best solution. There are fears that people will apply on a whim or even under the influence of alcohol.

A further concern, which was first raised in October 2009, is that more people from outside the UK will take advantage of the further relaxed process and undertake what has become known as ‘bankruptcy tourism’. By making it even easier, insolvency experts are concerned that the UK will see even more ‘bankruptcy tourists’ seek to take advantage and apply in the UK, whilst protecting their credit file in their country of residence. Rules governing who can apply are vague, only requiring applicants to be ‘economically active’. As things stand, this could be interpreted as simply having a UK bank account, or an NI number, or being temporarily employed in the UK.

The UK’s bankruptcy system is more relaxed than in other parts of Europe even in its current court-based guise. Whereas it can take up to 9 years to have debts completely written off in Germany, it can be as little as 12 months here.

At the same time that the new bankruptcy proposals are being criticised, the Government is considering loosening the rules that determine who is eligible for a Debt Relief Order (DRO). Introduced last year as an alternative to traditional IVA’s and bankruptcy, DROs offer a low-cost way of consumers finding their way out of debt.

Eligibility is means tested, with assets and levels of debt used to determine whether it is an applicable solution. Debt Relief Orders are aimed at people who can afford to pay £50 or less a month towards their debts (which must be less than £15,000), and have less than £300 in assets other than a car up to the value of £1000.

Pension funds are currently considered an asset, and so preclude anyone with a fund from applying. Under new proposals, this would change to allow people with a pension fund (up to a certain level) to enter into a DRO without having to surrender any part of that pension fund.

We’ll be reporting developments as they happen, but until then, remember that checkmyfile offers free, impartial advice about dealing with debt, and the options available if you are struggling.

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