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Just over two years ago, there were new rules in place that allowed a bankruptcy to be discharged within 1 year, instead of 3 has it had been. This led to many people filing for bankruptcy in order to obtain financial freedom from creditors. In fact, there were over 10,000 bankruptcies in the next full quarter after this new rule was put into place, an astounding figure.
"In April 2004, [part] of the Enterprise Act 2002 came into force, making it possible for a bankrupt to be discharged within a year," explains Danny Davis, head of the insolvency group at the law firm Mishcon de Reya. "This [has] led to a lot of people, particularly young people in their late 20s and early 30s, choosing to clear massive debts - credit cards and loans mostly - by declaring themselves bankrupt."
This allowed those without major assets such as a home or valuable possessions to walk away from creditors with little lost and their name cleared in just 12 months.
Steve Treharne, head of personal insolvency at accountants KPMG says: "There are probably some young and irresponsible people who view bankruptcy as an easy option, but for the majority of people it is the solution to a problem that has become unbearable and needs to be addressed urgently."
However, bankruptcy still led to may of the same problems, and even with the new rules in place, many people in debt are filing for IVA's or informal voluntary arrangements. There were 4199 IVA's from July to September of last year alone.
In an IVA, debts are frozen and are paid off at a certain manageable rate over a certain period of time. They are voluntary, so the terms can be changed at any time by the credit as long as the changes are legal, but most creditors stick to the terms in the IVA. After the length of the IVA is up, no more payments must be made.
"People are starting to take stock of their situation and seek help in repaying their debts rather than walking away," he insists. "Most people who are in debt want to repay what they owe, and IVAs offer a manageable way to do that."
IVAs still damage your credit and take longer to pay off (3-5 years), but they are a much better option than bankruptcy if you are dealing with a honest/reputable lender.
Diana Middleton writes on matters relating to debt advice in the UK, and especially debt problems. She is particularly interested in personal finance, writing on best approaches to getting a secured loan, IVA's and the background issues relating to debt consolidation. |
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