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Bankruptcy – The Big Con

id you know that in the UK Bankruptcy is cheap? Well, perhaps it is not exactly cheap if you are struggling to makes ends meet and you are unable to pay your bills.

After all, unless you were insolvent you would not be considering bankruptcy in the first place. Still, it is relatively cheap compared to other jurisdictions and compared to some other insolvency solutions in the UK. The main reason for this is that you can do it yourself. For an outlay of £700, you can petition for your own bankruptcy in the UK and if you live in Northern Ireland the cost is £640.

In Ireland by contrast, if you wish to petition for bankruptcy, you have to pay €650 to the Insolvency Service of Ireland payable to the Official Assignee, a further €102.50 in stamp duty (or €122.50 in the case of a creditor petition) and a further €500 in advertising costs (in a national newspaper in Ireland). It is understood that new legislation if passed will eliminate the need to advertise your bankruptcy in a national newspaper in Ireland but you will still have to publish details of your bankruptcy in Iris Oifigiul (the State gazette) at a cost of up to €75.

Let’s go back to the UK and Northern Ireland. All you need to be able to do is to fill out a few forms. For some people this can be a tricky task but for most people nowadays, it’s a piece of cake. So if you have £700 and can fill out the forms all you have to do is to bring them to your local bankruptcy court and ask for your petition to be dealt with. You do not even have to use a solicitor.

So why have certain firms been touting for business and offering to carry out this process for a fee of up to £1,700? For filling out a few forms, these firms are pocketing perhaps £1,000 per case. It’s a lucrative business but unfortunately it is at the expense of the poor unfortunate debtor who having become insolvent must now fork out an extra £1,000 more than is necessary to avail of the bankruptcy solution.

To drum up business, some firms have even claimed that debtors were mis-sold IVAs and have encouraged clients who were often in perfectly good and affordable IVAs to throw it all up and to go down the bankruptcy route. In some cases debtors were several years into their IVAs and yet were encouraged by these firms to stop making payments into their IVA (thereby causing them to fail) and to petition for their own bankruptcy. They told debtors that – ‘you may no longer be required to pay your current IVA payment’. These vulture companies even suggested that the debtor may be entitled to compensation – ‘should it be found or you decide that you have been placed in an inappropriate debt solution’. If the unfortunate debtor believed these claims and decided to petition for bankruptcy, the touting firm then grabbed its £1,000 fee – for filling out a few forms – and walked away, having messed up the naïve and innocent debtor’s financial affairs.

What marketing do these touting firms do? Where do they get the names of debtors already in an IVA? They simply trawl the Insolvency Register free online for the names of debtors in an IVA and then cold contact them. What could be simpler – or cheaper? This particular con has very low initial costs and very few entry barriers to the unscrupulous firm.

And if the debtor should take the bait and stops paying into his IVA what happens? For a start, the failure of the IVA and the commencement of bankruptcy would mean that the clock would start ticking again in terms of the damage done to the debtor’s credit file. Let’s suppose that the IVA had already run successfully for three years. When the bankruptcy now commences the clock is reset and the credit file cannot be repaired for another six years, instead of for just another three years if the IVA had been allowed to run its course.

For such touting firms to claim that an IVA was mis-sold when an alternative solution might have been more appropriate for the debtor implies that the advising Insolvency Practitioner or IP in the IVA – the nominee – failed to provide the debtor with adequate explanations of all available options, including bankruptcy. The touting firms would thus be alleging that the IP had engaged in the very malpractice that they themselves are up to their necks in – selling a service for commercial gain only, regardless of the best interest of the debtor or indeed of the creditors.

What can be done to stop such odious practices? The OFT has already taken steps to prohibit and inhibit activities such as these by rogue touting firms. Insolvency Practitioners themselves need to challenge such activities on a case by case basis, if only to protect their reputation for integrity and of course there is a role for the IP’s regulatory body to defend the reputation of its members. The Insolvency Service itself might also restrict access to the IVA Register so that only those with a truly valid reason could search it. For example such searches could be restricted to insolvency practitioners and lending institutions such as banks. The service perhaps should not be available to everyone free of charge. Strangely, in Northern Ireland you have to pay to carry out a bankruptcy search but an IVA search is free. Both searches are free and on line on the UK mainland.

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