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Bankruptcies soared to record levels last year. More than 10,000 people declared themselves insolvent in the last quarter of 2003 - up almost 30% on the same period the previous year.
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There has long been a stigma to becoming bankrupt. But statistics suggest it is seen increasingly as a way out of crippling consumer debts.
New rules that come into force next month should make it quicker for most bankrupts to get back on their feet. But debt advisers warn that bankruptcy should remain a last resort.
Insolvency practitioner John Alexander, a director at City accountancy firm Carter Backer Winter, says changes to the law are good news for bankrupts, but they are not without dangers. From April, bankrupts may be discharged within 12 months. The average term is expected to be about four months. Previously, bankrupts were automatically discharged after three years, or two years where debts were less than £20,000.
A bankrupt's home cannot count as part of their estate if it is not sold within three years. In the past, a trustee of a bankrupt's estate could try to sell a family home years after a bankrupt had been discharged.
'The one-year discharge rule should help to take a lot of the pain and exclusion out of bankruptcy,' says Alexander. 'People with big credit card and loan debts could view it as an easy option for getting to grips with their debts but, of course, it is not,' he says.
'As a bankrupt, the assets you own before and during bankruptcy will be the property of the trustee of your estate until your creditors are paid, even after you have been discharged.'
For this reason, Phil Stone at the Bankruptcy Advice Centre in Croydon, Surrey, says bankruptcy is only a viable option for those who own nothing of any worth and have no prospect of inheriting anything.
'If you have something of value and you choose bankruptcy, be prepared to lose it,' he says.
Stone says bankruptcy is catastrophic for many. 'We had a teacher who lost her job because she couldn't get a bank account to pay in her salary,' he says.
To declare yourself bankrupt, obtain a form from a local county court or the High Court for those in London. To petition for bankruptcy in Scotland, you must have debts of at least £1,500 and a creditor must be taking action against you through the courts.
The cost of being bankrupt will rise to £450 from next month. This includes the bankruptcy order and court fees. An official receiver is initially appointed to administer a bankrupt's estate, but then a licensed insolvency practitioner, usually an accountant, is appointed trustee.
Trustees sell off assets, including property, and pass the proceeds to creditors. As a bankrupt, you will have to ask the trustee's permission to obtain more than £250 credit and be required to disclose to any lenders that you are a bankrupt.
You will have to close any bank or building society accounts and may not be able to open another. You will also be unable to hold some public offices, such as school governor, magistrate, charity trustee or company director.
'Despite changes to the law, it is a mistake to think that becoming a bankrupt will not have a lasting impact on your life,' says Alexander.
'Though things are likely to get easier for discharged bankrupts and the stigma of failure is lifting, becoming bankrupt is complicated and stressful and it will make things difficult for them in the future.'
Stephen Rose at the Debt Advice Bureau agrees that bankruptcy should be a last resort. 'For those who have a reasonable credit rating and who need to reduce their payments, negotiating with creditors can work,' he says.
An informal arrangement with creditors allows a debtor to use disposable income, after day-to-day living expenses are covered, to pay unsecured debts over a longer term.
But where the debtor's disposable income exceeds the agreed credit payments, this arrangement is not available. If repaying the debts will take longer than seven years, an individual voluntary arrangement (IVA) may be an option, provided the debtor has a regular income.
An IVA is a formal agreement that lasts five years. Under an IVA, creditors receive minimum monthly payments in a structured plan.
The advantage of this arrangement is that debtors have greater control over their assets and are not labelled bankrupt when applying for credit.
Free, independent advice for people with serious debt problems can be obtained at:
Citizens Advice Bureaux: www.citizensadvice.org.uk
Debt Advice Bureau: www.debtadvicebureau.org.uk
Bankruptcy Advice Centre; 0870 088 5684
Insolvency Service: www.insolvency.gov.uk
National Debtline: 0808 808 4000
Consumer Credit Counselling Service: 0800 138 1111
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