New bankruptcy rules favour the reckless
With new consumer debt rising to nearly £11bn a month, we are being warned that a sequence of results - namely higher interest rates, falling house prices and consumer insolvencies - is becoming inevitable.
The national insurance rises, which took effect in April, add to the potential for serious consumer default.
It is in this worrying context that the government’s new enterprise-friendly insolvency regime is coming into effect. Last September, the government abolished the right of banks to appoint administrative receivers to companies that default on their loan repayments and at the same time gave up the Crown’s preferential rights in formal insolvencies.
But it is from next April that the rules governing bankruptcy will be subject to radical change. Currently, all those who are made bankrupt or apply for their own bankruptcy are treated indiscriminately, with some exceptions, without account being taken of the circumstances that led to their bankruptcy.
Come next April a new, streamlined system will apply that is essentially designed to remove the so-called ‘stigma of failure’, which the government sees as a constraint on risk-taking. The current range of automatic restrictions will be relaxed and the standard period of bankruptcy will be reduced from three years to a maximum of one.
Although the official receiver will be able to apply to the court for extended bankruptcy restriction orders in respect of individual bankrupts who are suspected of irregular conduct, he may also decide in individual cases that there are no suspicious circumstances, and that the bankruptcy order should be discharged before the year is out.
There are at least two potential downsides to this new, liberal approach to bankruptcy. First, unless the official receiver has the time and resources to investigate the background to each insolvency, the likelihood will be that those who may have committed irregular acts in the run up to their bankruptcy will be allowed to start afresh. And the more bankruptcies, the greater the pressure on the official receiver’s time and resources.
Second, the government’s thinking has been dominated by a concern to free unincorporated businesses from unnecessary, insolvency-related restrictions.
The circumstances in which the new bankruptcy restriction orders may be applied for have been framed with business debtors in mind. But the new regime could be exploited by consumer debtors, just as much as business debtors.
In this connection, the government has intimated that it will take steps to ensure the new fast-track procedure is not used by graduates as a means of discharging their liability for student loans. But if the ‘stigma’ of bankruptcy is removed for all practical purposes, and if an opportunity exists for graduates and consumers generally to painlessly divest themselves of debt, the chances are they will take it. By the time the new rules apply, the official receivers will be kept busy.