Why is it so expensive to go bankrupt?
I have just learnt that from 6 April 2010, the fee you will have to pay to go bankrupt will jump a whopping 25%, from £360 to £450. On top of this, bankrupts also have to pay a £150 court fee.
Although there are exemptions for those on benefits, April’s rise will mean that people struggling with serious levels of debt will be expected to stump up £600 to go bankrupt.
At a time when insolvencies are running at the highest level since records began back in 1960, this has just got to be total madness. Where is the caring government that professes to help and support the consumer?
You have got to ask whether this hike in fee has been done deliberately to keep the bankruptcy numbers down – perhaps it’s a ploy to force consumers into other options such as a long-term debt repayment plan, which offer little debt relief and do not appear in the bankruptcy figures?
With unemployment levels expected to climb again this year and more house repossessions likely, there will be an increasing need for people to petition for bankruptcy. Ironically, the fee prevents many from doing so.
I recently helped a lady – let’s call her Jo – who after being diagnosed with cancer was no longer able to work. Without an income, her house was repossessed and was eventually sold for £25,000 less than its true value - leaving the mortgage lender pursuing her for the shortfall, interest and legal charges of around £30,000.
However, Jo is struggling to meet even this £60 and is convinced that the underselling of her property has forced her into bankruptcy.
The problem is, with no security and no assets apart from an aging car, she will struggle to find the fee to go bankrupt. Having spent much time in helping her face up to the prospect and stigma of bankruptcy, I now dread having to tell her about this latest fee increase.
We need urgent action to help clear the ‘log jam’ of individuals, like Jo, caught in the limbo of being unable to take effective action to deal with their debt situation.
Instead of increasing the bankruptcy fee, it should instead be reduced in order to enable more to take this course of action and help erase their misery and suffering.
The last debtor’s prison shut 141 years ago in 1869. Society, culture and attitudes have moved on. It’s not a crime to be in debt – so why are people still made to pay such a high price?
According to the Insolvency Service, bankruptcy costs an average of £1,715 to administer (as of May 2009). Part of this cost is met with the current fee.
The Insolvency Service told me that if the bankruptcy fee was scrapped, then funds would have to be found elsewhere – potentially from taxpayers and lenders.
While I can see this is not an attractive prospect for many people who don’t need to go bankrupt, I’m not convinced it's likely.
A lack of support from lenders, coupled with interest charges, often forces people into bankruptcy in the first place. If lenders were forced to pay for some of the cost of administering a bankruptcy case, then they might be keener to help those struggling with debts.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
Debt management plan
Not to be confused with a consolidation loan or bankruptcy, a DMP is a service offered by a specialist debt management company that will negotiate with your creditors to change the terms of how they get their money back. The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, and you then pay the debt management company, which passes the money to your creditors minus its initial and subsequent monthly fee. This can be as high as 20%, which means you’ll pay down your debts slower than you thought.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.