When you owe a fresh start to your bankruptcy | Bankruptcy and VAT
With debt spiraling after 10 years of borrowing, Paul Broderick was approaching 30 in 2006 when he quit his local government job and, a few months later, went bankrupt.
“I had been indoctrinated into the culture of debt in college,” he says. “It was credit card after credit card, instant approvals, thousands of people going through the mailbox. I thought I was going to pay for it all. By the time I hit my late twenties, I achieved what I wanted out of life but couldn’t do anything because I had over £27,000 in debt around my neck.”
Between 2006 and 2010, personal insolvencies reached an all-time high. Broderick kept seeing the headlines about people going bankrupt and easy UK bankruptcy laws. After some research, he took the plunge.
“The process was simple,” he says. “I have had my income and expenses assessed and have met the requirements of having over £15,000 in debt with little disposable income.”
Bankruptcy is stigmatized, but Broderick, whose novel Bankruptcy logs was released in 2011, says it was the best thing he’s ever done. “It gave me a fresh start and I’m happy to live within my means now. haven’t done since,” added the 37-year-old. , who lives in north London and is currently working on her second novel.
Eileen Mulligan, debt adviser for 20 years, who works for Brighton’s Financial advice and community support service, says big debt is no longer about living the high life for many. “We are seeing more and more people applying for credit for their rent and food. The utility debts are huge and sometimes people just can’t pay,” she says. “Working people get into debt out of control. We contact banks who sometimes freeze interest and fees if they see that someone’s situation is very bad. This can help temporarily.”
Mulligan says bankruptcy is an option for some borrowers, “but it shouldn’t be taken lightly.” You may have to sell your house to settle your debts, and there will be other consequences. Bankruptcy will remain on your credit report for six years after your discharge and debts written off – normally one year after you take effect – and will make it harder to get a mortgage or other loans during that time. You may also have to declare it when you apply for a job, and it could exclude you from certain positions.
Mulligan says the service is increasingly working on debt relief orders (DROs). Introduced in 2009, they are similar to bankruptcies but for less indebted and less affluent people, and allow debts to be canceled, subject to certain criteria. To apply for a DRO (not available in Scotland) your debts must be £15,000 or less. You may own a car worth £1,000, but your other assets may only be worth a total of £300. Your disposable income each month should only be £50 or less, otherwise you will have to pay part of it to your creditors for a year.
Mary Joyce*, in her fifties, took DRO three years ago after a long period of absence from work, linked to complications following an operation. “I was struggling to buy food, then my mother passed away and the cost of the funeral made it worse,” says Joyce. She had read about DROs and turned to Citizens Advice in Nottingham for help. “I had to estimate my expenses,” she says. “I pay £35 a week for food, toiletries and cleaning supplies. But they said that wasn’t enough and I could allocate £60.”
Joyce wasn’t sure she was eligible for a scrutineer. But some people find that when allowable expenses are calculated (often using what is known as the “common financial statement”), there is actually less of a reserve than they think. “I now live more comfortably and can afford decent food,” says Joyce.
Sorcha Kennedy, a debt counselor who founded the Community Interest Corporation (CIC) money savior, says her customers are asking more and more questions about DROs, but, she says, they need careful consideration. “It’s often the lack of income that is the problem. Although a DRO can solve the problem immediately, as with any insolvency, debts can easily pile up again.”
Individual Voluntary Arrangements (IVAs) are another option if you owe more than £15,000, own property or fail to qualify for a DRO for any other reason. An IVA will see some of the debt forgiven, interest frozen and payments spread out so they are more manageable. The term of an IVA is usually five years and Kennedy says: “For this option you need to have a steady income to keep paying creditors.”
Derek Prince*, a local government worker in his early 50s, chose an IVA when his situation deteriorated. He borrowed for his daughter’s wedding ahead of an expected pay rise, but the cuts meant the raise did not materialize. “I didn’t actually own a house to protect, unlike many who choose IVA,” Prince says. “But I kind of felt it was morally important for me to repay as much as possible, which is easier to do via an IVA than bankruptcy.”
He and his wife at the time had a joint IVA. “We owed almost £60,000. We thought it was a lot less before adding it all up. Through an IVA company we agreed to repay almost half, including fees, over five years But we ended up settling at the start of last summer.”
Prince says the family lived on beans on toast, afraid to spend anything. “After starting the IVA we were entitled to £100 a week for food for the three of us. It was much better. My son and I still live on about the same budget and we feel comfortable and in control. It was definitely the right thing to do,” he says.
Kennedy advises talking directly to creditors if you’re having trouble managing and can’t or don’t want to access one of the formal insolvency proceedings. “You can ask about reducing payments and possibly put an informal agreement in place — a debt management plan,” she says.
organizations, including Stage change and National debt line have useful online tools for those struggling, and they – and Citizens Advice – may be able to negotiate on your behalf. “There’s a new app called Debtology which is good too,” says Kennedy.
She also advises people in difficulty to take control of their spending. “Try to ask for better deals or payment reductions and vacations from the companies you use. Sometimes cellphone companies will reduce your rate plan in the middle of your contract,” she adds.
The key, she says, is to try to deal with the situation as quickly as possible and research your options.
*These names have been changed