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27
NOV
2006

Alarm at quickie bankruptcy plan

THE ultimate in no-fuss bankruptcies has been put before Parliament for approval. To qualify, you need only persuade a public official that there is no way you can ever pay what you owe. One year later, your insolvency would be discharged and your debts written off. No courts would be involved.

Banks are alarmed by the proposed super-fast, fuss-free bankruptcy for those unable to pay off debts of up to £15,000. The measure is contained in a Bill put before Parliament earlier this month. Under the plans, people with minimal assets or income would be granted a debt relief order (DRO) after a simple interview at a local Official Receiver’s office.

The order would subject the debtor to the same restrictions as a bankrupt for 12 months. Privately, one senior banking source suggested that the ‘quickie’ bankruptcy culture could lead to banks curbing their lending to poorer sections of society, leaving the field free for ‘sub-prime’ lenders or even loan sharks.

The provision included in the Tribunals, Courts and Enforcement Bill, is the latest in a string of legal changes aimed at making life easier for people who want to declare themselves insolvent.

Eric Leenders, executive director of the British Bankers’ Association, said: ‘We have to be very careful that with the whole panoply of legislative change we are not suggesting that walking away from your debts is more expedient than honouring agreements.’

Spiralling numbers of personal bankruptcies and a rise in the number of people going into individual
voluntary arrangements (IVAs) – under which creditors get back only part of what is owed – have recently
triggered criticism from senior bankers.

In August, Lloyds TSB chief executive Eric Daniels attacked those with a carrdicr attitude to repaying
their debts. In the same month, WSBC chief executive Michael Geoghegan criticised debt-advice companies that urged people to declare bankruptcy.

In 2002, the law was changed and the period during which a bankrupt person was prevented from leading a normal financial life was cut from three years to just 12 months. Personal insolvencies have rocketed,
with a 26.6 per cent rise in the number of bankruptcies to 15,416 in the third quarter compared with the
same period in 2005, and a 117.9 per cent surge in the number of IVAs in the third quarter to 12,228.

One senior source in the debt-counselling industry predicted that the number of DROs could soon eaual
the existing total of bankcruptcies and IVAs put together – more than 27.000 each quarter. It is thought that the Official Receivers’ service, funded largely out of its own fees, can hire any additional staff required.

Britain’s leading debt-advice charity, the Consumer Credit Counselling Service, is to start providing IVAs
from next spring. This will put the service in direct competition with commercial providers, some of whom have been criticised for misselling IVAs to collect the fees.

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