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Personal Finance: Bankrupt rules may backfire.

Byline: John Cranage Personal Finance Editor

Liberal new bankrupt laws could backfire by encouraging irresponsible borrowers to take on more debt, Birmingham finance experts have claimed.

The Enterprise Act, which came into force on Thursday, will see most bankrupts discharged within a year and some within six months.

The Government claims that the new regulations will mean fairer treatment for people who have become bankrupt through no fault of their own while doling out tougher treatment for those who take advantage of their creditors. Under the Act, most bankrupts will be automatically discharged after a maximum of 12 months, rather than two or three years as is currently the case.

But at the same time Bankruptcy Restriction Orders will be introduced to protect businesses and the public from bankrupts whose conduct is reckless, culpable or irresponsible.

However, bankrupts will still risk having their home and other possessions sold to repay their debts and face restrictions on taking out mortgages, credit agreements and bank accounts. They will also continue to be listed on a public register.

Figures recently showed that since 1999 the number of people going bankrupt had by 30 per cent, from 21,611 to 28,017 in 2003.

And numbers are now set to escalate further, according to Phillip Allen, a personal insolvency specialist at Baker Tilly in Birmingham, who says the Act could well have the reverse effect and increase already dangerously high levels of consumer borrowing.

'If the stigma of becoming insolvent is removed people might become more careless with their money and less concerned about getting into debt,' said Mr Allen.

He went on warn that even though the Government wants to remove the stigma of bankruptcy as part of its drive to boost the culture of enterprise and entrepreneurialism it is still not a soft option.

'Bankruptcy has never looked good on a CV or a credit application form,' he added.

Andrew Menzies, recovery partner at Grant Thornton in Birmingham, said: 'Just four for five years ago we were seeing individuals with unsecured debts of pounds 20,000 - now it is not uncommon for an individual to have credit and store card debts of pounds 50,000-plus. The new measures could prove too tempting for too many individuals who, ignoring the very serious consequences, may mistakenly see bankruptcy as a relatively painless get-out clause.

'While the Act will probably be successful in achieving its aim to get what is a small number of entrepreneurs back on their feet more quickly and with much less stigma, it could encourage many others to file for bankruptcy thinking there is an easy exit for them.'

Students, particularly, are attracted to the idea of pressing the financial 'reset button' and by washing off debts stacked up at university. The number of student bankrupts trebled last year and graduates, some of whom leave university with debts totalling more than pounds 10,000, have been identified as the group most likely to take advantage of the new regulations.

They argue that because they have few assets there is little for them to lose. And with the average age of the first-time housebuyer now 32, the prospect of not getting a mortgage doesn't worry a 21-year-old.

But things are not that simple, the experts warn.

For example, most private landlords now check credit files when assessing potential tenants, Neil Munro of Equifax, a credit reference agency, points out.

'If many students declared themselves bankrupt, then certainly the Government's aim of reducing the stigma will be met,' said Barry Stamp, joint managing director of credit information website

'But the knock-on effect on the Student Loan Company, and on lenders generally, would be unthinkable.

'The costs of writing off high levels of student debt would undoubtedly be passed on to other customers, leaving the average man in the street to pick up the pieces.

'Despite the relaxations, there can be no doubt that lenders will always ensure that their lending criteria excludes bankrupts, plus, most employers will view discharged bankrupts unfavourably.'

Also, bankrupt students are barred from certain professions.
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Title Annotation:Features
Publication:The Birmingham Post (England)
Date:Apr 3, 2004
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