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Last Updated: Tuesday, 4 October 2005, 11:32 GMT 12:32 UK
Pain relief for bankrupts
By Julian Knight
BBC News Online personal finance reporter

An outstanding bill
Concerns are mounting about rising debt levels

New rules aim to take the stigma out of going bust. But is it welcome reform of an anachronistic and punishing law, or a debtors' charter?

Bankruptcy has long been a dirty word in Britain.

In the Victorian period, bankrupts would often find themselves in debtor prison.

Even today bankrupts are barred from becoming MPs, magistrates, school governors, and even from sitting on local authority drainage committees.

  • See how UK bankruptcies are on the rise

    But changes contained in the Enterprise Act 2002, due to come into force on 1 April, will see the treatment of UK bankrupts change dramatically.

    Bankruptcy will be less punishing, a sweeter option, as a result of these changes
    Digby Oldridge, Credit Services Association

    Most bankrupts could find themselves discharged within a year, an improvement on the current two or three years.

    In addition, being a bankrupt will no longer be a bar to holding public office.

    'Use it or lose it'

    Crucially rules governing how the homes of bankrupts are treated will change.

    Trustees acting on behalf of creditors will have three years to deal with a bankrupt's interest in the family home.

    This "use it or lose it" rule will stop trustees from forcing bankrupts to sell their homes after many years, perhaps following a housing market recovery which has moved the bankrupts home into positive equity.

    Bankruptcy key changes
    Automatic discharge after one year
    Creditors have three years to deal with bankrupt's home
    Some bankrupts may continue to pay off debts even after discharge
    Dishonest, reckless or blameworthy bankrupts could face restrictions for up to 15 years

    But is this the right time to be easing the sanctions that can be used against bankrupts - with UK consumer debt widely tipped to top 1 trillion by the summer?

    "Bankruptcy will be less punishing, a sweeter option, as a result of these changes," Digby Oldridge of the Credit Services Association told BBC News Online.

    "The idea is to move us to an American system where bankruptcy is not stigmatised and where risk-taking is encouraged.

    "But at the end of the day someone has to pick up the bill for business and personal failure."

    Easy ride

    But the government's Insolvency Service, responsible for putting the law changes into practice, is adamant the new regime will be tough on bankrupts.

    "Where bankrupts can make a contribution they will pay - this is not an easy ride," Desmond Flynn, chief executive of the Insolvency Service said.

    I don't anticipate that as a result of these reforms we will see bankruptcies rise
    Desmond Flynn, Insolvency Service

    Mr Flynn pointed out that bankrupts could be forced to repay their debts after discharge, for a period of three years.

    In addition, bankrupts deemed to have been "dishonest, reckless or blameworthy" in their actions will face extra sanctions.

    Bankruptcy Restriction Orders (BROs) will bar people from obtaining credit without disclosing their status, trading under a different name or holding a company directorship for anything up to 15 years.

    The Insolvency Service will decide, on a case-by-case basis, if a BRO order should be pursued through the courts.

    The service said consumers who recklessly take on debt could find themselves issued with a BRO if they go bankrupt.

    Overall, the Insolvency Service estimates that between 7-12% of bankrupts will have BRO proceeding brought against them.

    No free lunch

    However, the service is convinced that the changes will not lead to extra bankruptcies; rather that it will lead to more effective handling of cases.

    "I don't anticipate that as a result of these reforms we will see bankruptcies rise," Mr Flynn said.

    Mr Flynn plays down the danger that students, in particular, will use the relaxation of the bankruptcy laws to escape their debt burden.

    "Last year only 900 out of 26,500 bankrupts listed the student loan company as a creditor. The National Union of Students has said that bankruptcy is not a free lunch and can prejudice employment prospects," he said.

    However, John Verrill, chief executive of the Association of Business Recovery Professionals, is less sure that the new rules will not lead to more bankruptcies.

    "The worry is that bankrupts with no income and no assets will be able to dump their liability in double-quick time. In truth, there is little incentive for consumers to behave responsibly," Mr Verrill said.

    A graph indicating bankruptcies



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