Debts & Loans

Bankruptcy rates soar as recession starts to hit hard - how you can avoid going bust

Personal bankruptcy has soared by 12 per cent in the past three months as the credit crunch hits, according to the Insolvency Service. More than 16,000 people were declared bankrupt in the third quarter of the year – around 165 people a day.

The rocketing figures prove that more and more people are struggling with extreme debt problems. Bankruptcy is usually the last resort for people who can’t pay their debts. People declared bankrupt lose all their assets, including their home, which must be sold to pay creditors.

While they are discharged from bankruptcy after a year, they then may not be able to borrow again for years – so it’s important to try to control finances before you are forced into bankruptcy.

The first step is to admit you’re in a financial mess, then talk to your family, before seeking professional help. There are several organisations and charities that offer free debt advice. They will be able to talk through your options, draw up a budget to get your finances back on track and help you draft letters to creditors offering affordable repayment terms.

If things really are tough, it could be worth considering an Individual Voluntary Arrangement (IVA), rather than accepting bankruptcy. An IVA is a deal between you and your creditors, normally arranged by an insolvency practitioner. The creditors are offered a proportion of the money owed, which they may accept rather than face getting nothing if you go bankrupt.

With an IVA you can hang on to your home, but you must pay off your debts over five years.

If you miss a payment, the deal lapses and you will be declared bankrupt, anyway. Talk to the debt charities about the pros and cons of IVAs. They may be able to help you sort out debts without resorting to a formal arrangement.