Are bankruptcy proceedings becoming too easy?

When it comes to appearing to reduce the stigma of personal bankruptcy England and Wales appears to be well ahead of most in the developed world. But has petitioning for personal bankruptcy become just a tad too easy and are the repercussions a great deal too attractive to deserve praise?

At times of recession such questions come to the fore. Many now think the bankruptcy process here is altogether too easy and positively encourages reckless spending. Throughout Europe, when the money starts to run out and the debtor's mind turns to shopping for the best bankruptcy forum, there is little disputing that there is no place better than here to present the petition in bankruptcy.

Throughout living memory, our courts have asserted a wide jurisdiction over foreign nationals to make bankruptcy orders and even though that was curtailed by the EC regulation on insolvency proceedings (1346/2000), the regulation did not harmonise the insolvency laws of the various member states. It merely recognised the general principle that the law to be applied is that of the state in which the proceedings are being conducted. As a consequence, provided the debtor establishes their centre of main interest (COMI) in this country, our insolvency laws apply when a petition is presented. For the citizens of many member states where the insolvency laws are more stringent, that represents an attractive proposition.

Bankruptcy tourism

Since 2004, when the bankruptcy laws were changed reducing the time before automatic discharge from bankruptcy from three years to one year (or in some cases less) anecdotal reports indicate that this country has become a focus for 'bankruptcy tourism'. This is little wonder when, for instance, the penalty period following bankruptcy in Germany is seven years while in Ireland it is 12.

No matter how reckless the spending, or morally blameworthy, unless a bankruptcy restriction order is sought for careless, criminal or fraudulent behaviour, the actual term of bankruptcy cannot be extended provided the debtor co-operates with the Official Receiver or trustee in bankruptcy once the bankruptcy order is made. Even assets acquired by the bankrupt, that are not realised by his trustee to pay creditors, are retained after discharge. Such a regime does little if anything to deter the spendthrift and even the note maintained on the credit record of bankrupts for six years seems to be too short a period to represent a deterrent to many.

Even the court process is becoming less formal with many courts adopting the practice of not requiring the debtor to appear before the court but, instead, simply referring the debtor's petition to a Registrar (which term now includes under Part 1, paragraph 1.1(8) of the new Practice Direction in Insolvency Proceedings introduced earlier this year, a district judge in a District Registry of the High Court and in any county court having insolvency jurisdiction) to be considered on paper without any personal appearance by the debtor making the process a particularly painless exercise.

Some argue that the more traditional short hearing when the debtor appears before a judge when the petition is considered is preferable in order to maintain vigilance, for example, against forum shopping, but also to retain some formality in the proceedings to mark the fact that the step into insolvency should not be taken lightly and without considering the long term repercussions.
For many that hearing provides an emotional release of huge psychological significance and the fact of having to appear in court can be a deterrent to reckless financial behaviour.
A paper-only procedure with the future prospect of being able to petition for bankruptcy online, without need to go anywhere need a court, will simply provide an easier process which many will embrace without due consideration of the consequences; leaving many hard working creditors, rather than the debtors, seemingly being the real victims of the process.

Heartache and misery

Regrettably, for many, the consequences of being adjudicated bankrupt are not apparent until after the order is made; and all too often the impact on their credit rating remains a mystery. Too little publicity is given to the firm stance taken by banks, building societies and other credit institutions, against lending to discharged bankrupts; debtors often pile on debt thinking bankruptcy represents an easy way out but the massive repercussions linger on for years afterwards with mortgage lenders often asking applicants if they have ever been bankrupt and declining assistance if the answer is 'yes'. Similar situations can arise when applying for employment or renting accommodation.

Easy credit can ultimately cause long ?term heartache and misery and the quick fix that appears to be bankruptcy in fact has a nasty sting in the tail of which many are unaware. It is now, in these times of austerity when the public are constrained to rein back on expenditure, that the opportunity should be taken to educate consumers about the long term realities of bankruptcy and the benefits to be gained from financially prudent living.

However, it is fallacy to believe that the seemingly attractive option of bankruptcy is an easy way to resolve financial worries; despite the procedure into bankruptcy becoming ever easier it remains a life changing event best to be avoided.

Modern day bankruptcy does bring an end to the immediate pressures of debt, and though the stigma attached appears to have lessened, in this age of internet communication affording swift global access to information, those who think bankrupts have it easy would do well to reflect and reconsider the reality of the situation.