Credit crunch: is Bankruptcy a way out?

A rising tide of debt is forcing thousands to think the unthinkable. Is it wise?

Amid talk of a “credit crunch” or “credit squeeze”, ponder this: in 2007, the number of people who petitioned in court to become bankrupt was twice that of 2003. And it was not the creditors who were calling the shots — more than three-quarters of the applications for Bankruptcy were by the debtors themselves.

It would be wrong to say that Bankruptcy is becoming fashionable, but is the stigma diminishing in a world over-burdened with debt? Is there simply no sensible alternative?

Many debtors still feel that Bankruptcy really is a choice of last resort and that the mud will stick for years to come. Others feel it is an easy and convenient escape route from a mounting pile of liabilities. Let’s consider the main advantages and disadvantages.

Advantages:

• * After the period of Bankruptcy is over, most of your debts are discharged. As the period can be as little as one year, Bankruptcy may be a small price to pay to get out of your money troubles.
• * Most creditors will have to deal with your trustee in Bankruptcy rather than chasing you personally for the debts. No more knocking on the door by debt collectors.
• * You are allowed to keep certain things such as household goods and a reasonable amount to live on.

Disadvantages:

• * You will not be able to apply for more credit while bankrupt. Even after discharge your credit rating will be affected for several years.
• * If you own your own home it might have to be sold together with other assets, your business, and luxury possessions, including your car.
• * If you didn’t co-operate with the Official Receiver or the terms of your Bankruptcy you might be subject to a Bankruptcy restriction order which can restrict your financial dealings for up to 15 years.
• * Some debts cannot be written off including items such as student loans, court fines and debts which are secured such as mortgages or charging orders against your property.
Bankruptcy, not least the legal profession.
• * Bankruptcies are made public. No keeping it a secret.
• * You actually have to pay several hundred pounds in court fees to apply to make yourself bankrupt.

Does it still look like an attractive option? If there were no stigma or dire consequences attached to Bankruptcy, even more people would be giving it serious consideration. That in turn might cause the credit companies to consider the extent to which they lend money. We may end up in a rather different financial climate altogether. It may already be happening.