The Insolvency Service is to publish figures showing the number of people becoming insolvent between the months of January and March.
I expect to see a steep rise in the number of people entering into a Debt Relief Order (DRO) or “Bankruptcy light” as it is commonly termed. DRO’s are an alternative to Bankruptcy for people who have smaller debts, no assets and little surplus monthly income. I expect to see a rise in this type of insolvency because the debt figure for people able to enter into a DRO increased last October from £15,000.00 to £20,000.00. Consequently, people with larger debts can now enter into a DRO rather than Bankruptcy. The only other alternative to Bankruptcy or a DRO is an Individual Voluntary Arrangement (IVA) where the debtor has surplus money each month and this is shared out between creditors.
There have been significant changes with regard to the Bankruptcy regime which came into force from the 6th April this year. Broadly, a debtor now doesn’t have to petition for their own Bankruptcy (Debtor’s Petition) through the Courts, the decision as to whether someone should be made Bankrupt or not is now a judicial one made by a District Judge in a local County Court. The debtor simply has to complete an online application and an Adjudicator from the Insolvency Service will determine whether that debtor should be made Bankrupt or not.
Due to the above changes in Bankruptcy procedure I expect to see a sharp rise in Bankruptcies over the next few months due to three main reasons.
- The amount of money it costs to be made Bankrupt has now been reduced as the application is no longer made through the Courts. It now costs a total of £655.00 to be made Bankrupt and this can now be paid in instalments rather than a complete, upfront payment which was the previous procedure.
- HMRC is bringing significant Bankruptcy petitions for debtors who have entered into what are now termed “tax avoidance” schemes. Personally, I act for the Professional Footballers Association (P.F.A) and advise their members in relation to insolvency difficulties and I have seen a sharp rise in P.F.A members being served with Accelerated Payment Notices (APN’s) in relation to HMR film scheme liabilities.
- The stigma and worry of going to Court to be made Bankrupt has now been removed. The application can be completed from the comfort of a debtor’s front room! I think this will have the most significant impact as it removes the worry and stress associated with standing before a Judge in Court to await a decision. This has deterred a significant amount of debtors where Bankruptcy would have been the best option for them. This barrier has now been removed and this is the main reason I expect the Bankruptcy figures to increase significantly over the next few months.
There may be a more significant financial reason why Bankruptcies and all other types of insolvency for that matter may increase significantly over the medium to long term. Interest rates have been at rock bottom for many years now, since the end of the financial crisis in 2008. Statistics suggest that people maybe taking too much advantage of the cheap credit available, both secured and unsecured, and are maybe overstretching themselves. Only time will tell when interest rates do eventually rise, whether those same people can afford the hike in credit repayments on a month to month basis.
My advice to anyone facing bankruptcy is to continue to pay down debts as much as possible and to avoid the temptation to take extra credit on. Although a mortgage interest APR of less than 2% and unsecured lending at less than 4% may seem attractive to those with good credit and able to take on this borrowing the golden rule remains – pay debt off when you can to weatherproof yourself as much as possible for when interest rates increase!
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