It’s natural to feel worried about bankruptcy, but some websites set out to make it sound a lot worse than it is.
Some of what they say is simply wrong.
Other bits may be right but they leave out important facts, so the issue sounds more difficult than it is in practice.
And it’s common for problems associated with bankruptcy to be listed in detail, but very similar points about Individual Voluntary Arrangements (IVAs) to be ignored.
Why would websites do this?
You may be a looking at a website whose name suggests it gives advice on bailiffs or bankruptcy… but often that is not why it has been set up!
Most of those websites belong to firms who are IVA lead generators, also called IVA introducers. These are companies whose only source of income is the large referral fee they will get from selling your details to an IVA firm. Sounding like they are helping you with bailiffs or bankruptcy is just a way to get you onto their website.
One way to get you to want an IVA is to make the alternative of bankruptcy sound like something to be avoided. This year the Insolvency Service, a government department, said:
debtors were being steered towards an IVA due to the effects of bankruptcy, when in reality bankruptcy may have been the most appropriate option and would have had little or no more impact on the individual than an IVA …In some instances, there was also evidence that introducers .. may be misleading people about the bankruptcy process.
The errors, the exaggerations and the facts
Here are some examples. taken from websites in December 2018, with my comment on each.
Court and the application process
“Going bankrupt involves going to court.”
Wrong – the bankruptcy application process has been online since April 2016.
“should your request to declare bankruptcy be accepted”
It’s common to see something like this. You may be worried that you won’t be allowed to go bankrupt. But more than 99% of bankruptcy applications are approved and most of those rejected come from non-UK citizens.
“With bankruptcy you will need to make sure all debts included are listed to the Official Receiver, in order for them to all be captured in the bankruptcy.”
Wrong! It is actually a major advanatge of bankruptcy compared to IVAs or DROs that all your debts are covered even if you don’t list them on your bankruptcy application.
If the official receiver believes it would help the investigation, members of your family, or employers could be scrutinised in court.”
That sounds terrifying. In practice it doesn’t happen.
Selling your assets
“any assets you have will be used to pay off your creditors.”
“you will hand over all rights to your personal belongings (assets) to a ‘Trustee’. It’s the Trustee’s job to oversee the sale of your assets”
They sound scary and intrusive. It would be a lot less worrying if the pages had mentioned that your clothes and normal household possessions aren’t at risk and you don’t even have to list them. Apart from a house with equity or an expensive car, 99% of people will not have anything else sold and no-one will visit your house.
Access to banking and credit
“During the bankruptcy you cannot use your bank account”
Alarming – how could you manage without a bank account? It would be more accurate to say if your bank closes your current account, you can open a new basic bank account with any of nine banks.
“In bankruptcy it is likely that all bank accounts will be frozen.”
But only for a couple of days – they don’t mention that!
“If you are made bankrupt you have to follow certain ‘restrictions’, including the prevention of borrowing more than £500 without telling the lender. It is a criminal offence if you break these restrictions.”
True. But these websites rarely say the equivalent on their IVA pages: that you have to get permission from your IVA firm to borrow more than £500 and if you break this rule you can be made bankrupt. Or that the IVA restrictions normally last for five or six years, whereas the bankruptcy ones are normally for one year.
Making monthly payments
“You are usually discharged from your bankruptcy 12 months afterwards however it could be deemed necessary for you to pay back into your debts for a further 3 years.”
Misleading. Many people will read that as making payments for four years – that’s wrong, it is a maximum of three. And five out of six people who go bankrupt don’t make any monthly payments at all.
“compared to other arrangements such as bankruptcy – which leaves a mark on your credit file for up to six years – [an IVA] may not be quite as impactful.”
Wrong. An IVA leaves an insolvency marker on your credit record for 6 years, just like bankruptcy.
And vague assertions
Bankruptcy orders can be fairly monumental
It’s not clear what that means, but it doesn’t sound good!
“For many people, an IVA is the preferred solution as it enables them to avoid bankruptcy and all the unsettling consequences that come with it.”
If you think bankruptcy is “unsettling” and an IVA isn’t, you need to read about all the things that can go wrong with IVAs and their high failure rate! Which most IVA lead generator websites don’t discuss.
Getting some good advice
Going bankrupt is a big decision, as is an IVA or Debt Relief Order. If you can’t decide between two options:
- a DRO is always best if you meet the criteria;
- Bankruptcy or an IVA has a direct comparison.
You need good advice from someone that isn’t going to make any money out of you whatever you decide to do.
I suggest you go to your local Citizens Advice if you would like to talk to an adviser face-to-face, or call National Debtline if you would prefer the phone or webchat.