The thief, his wife and a canoe has been airing on TV recently, chronicling the story of John and Anne Darwin and their elaborate fraud designed to avoid spiralling debts and bankruptcy. John Darwin, a self-confessed risk-taker when it came to financial matters, and from humble beginnings, claims that the stigma of filing for bankruptcy was too much to bear. Instead, he faked his own death and with the help of his wife, claimed a number of life insurance payments in order to “start again”. But why is there so much stigma associated with filing for bankruptcy? In this article we’ll look at the process, the possible alternatives and how you can get back on track following bankruptcy.
How does bankruptcy occur?
In general terms, there are three different routes to bankruptcy.
1. An individual can apply to be declared bankrupt if they can’t pay their debts and the amount owed is more than the value of their assets;
2. A creditor can present a petition to court to seek to make an individual bankrupt if they owe them more than £5000; and
3. An insolvency practitioner can make an individual bankrupt if they breach the terms of an IVA (more on that later).
If we look at the monthly figures released by HMRC, we can see that at the present time, people applying for their own bankruptcy are far more common than creditor applications. March 2022 figures show that of the 633 bankruptcies, 549 (87%) were individuals applying for their own bankruptcies . This does suggest that the stigma is not what it used to be.
Why the stigma?
It’s unusual for those who find themselves in financial distress to go to such extreme measures as John Darwin to avoid bankruptcy, but there is still a reluctance by many to use bankruptcy to get back on track. High profile cases have associated bankruptcy with criminal activity – the case of former Wimbledon champion Boris Becker for example – who was recently found guilty of four charges under the Insolvency Act relating to his bankruptcy in 2017.
Historically, there was a large stigma in the days of debtors’ prisons which existed in the 18th and 19th century. Those who could not pay their debts were imprisoned and only usually released when the debt was settled or an agreement was reached with their creditors. Fortunately, debtors’ prisons were mostly abolished by the Debtors Act of 1869.
Thankfully there have been vast changes since that time and now the stigma may be due to the fact that when you apply to be made bankrupt the fact that you are bankrupt becomes a matter of public record. An individual who is declared bankrupt is subject to bankruptcy restrictions for 12 months, after which time they will be discharged from their bankruptcy and their details will usually remain on the Individual Insolvency Register for a further 3 months. Bankruptcy will also appear on a bankrupt’s credit file for six years, which may affect their credit score and make it much harder to get credit.
It’s worth bearing in mind that being bankrupt does not mean that you can’t change your financial position around. Lots of famous business people have “come back” from being declared bankrupt – Elton John, Sarah Ferguson, Mike Tyson, Burt Reynolds and Michael Jackson were all declared bankrupt at some point in their lives.
What are the alternatives?
Before going ahead with the decision to apply for bankruptcy it is useful to explore all available options.
(a) Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangements (IVA) is a formal, legally binding agreement a between an individual and their creditors. An IVA proposal must be approved by creditors and is managed by an insolvency practitioner.
An IVA provides a formal structure to enable an individual to make repayments to creditors based on affordability rather than at the previous contractual arrangements. The individual will agree to pay their creditors as much as they can afford throughout the term of the IVA but no more. This may be through monthly repayments, a lump sum following realisation of an asset, or a combination of both. In turn, the creditors agree to accept the payments in full and final settlement of the debt, provided the IVA is completed. The IVA will also set out the terms should a default take place.
(b) Debt Relief Order (DRO)
If the debt owed is £30,000 or less and the individual does not own any substantial assets or have much surplus income each month, then a DRO might be suitable. As with bankruptcy there are certain debts not “written off” by a DRO and it will stay on your credit record for 6 years.
(c) Breathing space
It may be possible to apply for a 60-day period of “breathing space” during which time creditors cannot contact the individual, take action to make them pay or add interest and charges to the debt. This may give enough of a break to get back on track with their finances. An individual would need to take advice from a specialist debt advice provider or a local authority. Those with mental health issues may be able to seek a longer period than 60 days.
The best option will very much depend on the amount and types of debt owed as well as the assets and business affairs of the individual. The best thing to do is seek help early and not ignore the problem. Seeking help early from a reputable practitioner or insolvency lawyer will mean that there will be more options available to you. Sometimes bankruptcy might be the right option for an individual but the misinformation and fear is what is stopping an individual from seeking advice.
Isadore Goldman have extensive experience advising individuals on the right solution for them, and have contacts with insolvency practitioners should the best solution be something they can help with (such as an IVA).