39 BANKRUPTCY IS NO LONGER A CALAMITY

According to Adam Smith, ‘Bankruptcy is perhaps the greatest and most humiliating calamity which can befall an innocent man. The greater part of men, therefore, are sufficiently careful to avoid it.’ Alas, in the twenty-first century many no longer seek to avoid it and see no stigma at all in bankruptcy.

DEFINING IDEA…

Interest works night and day in fair weather and in foul. It gnaws at a man’s substance with invisible teeth.

~ HENRY WARD BEECHER, SOCIAL REFORMER

In Smith’s day, people obviously went to great lengths to avoid bankruptcy or declaring insolvencies. Nowadays legislation appears to go to great lengths to make this extremely easy. According to the Insolvency Service there were 27,087 individual insolvencies in England and Wales in the third quarter of 2008. That’s 298 people a day, or 1 every 4.8 minutes! This was an increase of 8.8% on the previous quarter and an increase of 4.6% on the same period in 2007. International accounting and consultancy firm KPMG predicts that number will rise to 150,000 in 2009, no doubt facilitated by further loosening of legislation, which makes bankruptcy even easier.

In 2009, Debt Relief Orders will allow low-income borrowers to declare themselves bankrupt online without attending bankruptcy court or dealing with the usual hassles and associated costs. However, it would be unfair to lump everyone in the same category. For some, it is simply the case that a business venture has gone wrong and certainly, there is something nobler about business related insolvency than credit card irresponsibility. Many famous entrepreneurs, including H. J. Heinz, Walt Disney and Milton Hershey of the chocolate empire, experienced bankruptcy before they made their fortune.

It is this fundamental desire to support industry that has created an even worse situation in the US. Born from the spirit of enterprise, the American Constitution supports that ‘have a go’ mentality without wishing to penalise too heavily when things go wrong, with repercussions. In America, between one and two million bankruptcies occur every year!

Meanwhile, in the UK, bankruptcy has at least some consequences. There are still certain professions from which you would be excluded, although bizarrely you would still be allowed to manage other people’s money in the financial services industry or become an MP. In addition, you would almost certainly find access to credit severely limited. However, if you consider that the era of easy money is undoubtedly over, fewer people are gaining access to credit anyway, so it’s questionable just how much of a difference being declared bankrupt will really make.

For those for whom personal responsibility is no foreign concept, an Individual Voluntary Agreement (IVA) may be a more preferable route. These are more flexible and allow the debtor to write off part of the debt while negotiating with creditors to repay the rest over an agreed timeframe.

HERE’S AN IDEA FOR YOU…

If you find yourself in financial difficulties, seek advice from an independent source such as the Citizen’s Advice Bureau or similar organisations worldwide. If you go to a loan consolidation company, then they will advise you to do what’s profitable for them, not necessarily the best for you. Consolidating loans simply means that you spread the payment terms out over a longer period and pay back even more interest than necessary.