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A formula for fecklessness

11 February 2009

12:00 AM

11 February 2009

12:00 AM

The Insolvency Service has sent me a questionnaire seeking my views on bankruptcy. At first, I was enthused by this chance to say what I think about Gordon Brown’s reforms which have led to an explosion in personal bankruptcies — a record 200 of them per day in the last quarter of 2008 — and the growth of a culture in which the feckless walk away from their debts. Unfortunately, the more I worked my way through the multiple-choice questions, the more I realised it was not going to allow me to state what I really think. In fact, it was clearly designed to help the government work out how it might get away with making bankruptcy even easier. So instead of completing the questionnaire, I am sending this letter:

Dear Insolvency Service,

Thank you for your questionnaire. I have given up trying to fill it in. It isn’t possible for me to answer whether I agree or disagree with such statements as ‘A bankrupt is merely a victim of circumstances’. That might be true, for example, in the case of somebody dragged down by a creditor who files for bankruptcy. But it is quite clear to me that the 2002 Enterprise Act, which sought to encourage enterprise by making bankruptcy shorter and easier, has mainly served the interests of feckless consumers who never intended to pay off their debts. In the two years following the introduction of the new measures on 1 April 2004, personal bankruptcies nearly doubled; that at a time when the economy was still booming. Needless to say, they have continued to rise as the economy has sunk, and a forecast by KPMG suggests they may rise by another 50 per cent this year. Few will have much to do with enterprise: according to a study by John Tribe of Kingston University’s Centre for Insolvency Law and Policy, just 16 per cent of bankruptcies are the result of business failure; the rest are consumers who have got themselves into trouble.

The following quote from a 27-year-old single mother up before the Bankruptcy Court in 2006, having run up £15,000 of credit-card debts, sums up the attitude of many: ‘Bankruptcy isn’t going to affect me, because it only lasts for a year. There aren’t any consequences, if you don’t own a house or a business. Why cripple myself with the minimum repayments when I don’t have to?’

I have no doubt that the ease of bankruptcy contributed hugely to current economic problems, encouraging irresponsible attitudes to debt. Your questionnaire is specifically about bankruptcy, but the problem does not end there. Bankruptcies would be higher still had the 2002 Act not also made it easier to seek Individual Voluntary Arrangements, which allow people to walk away from the majority of their debts while hanging on to their assets. We force the elderly to sell their houses to pay care-home costs — even though they have contributed many thousands of pounds in tax over their lives. Yet go out on a mad spending spree, racking up debts you can never repay, and you can still cling on to your property.

I hate the expression ‘writing off’ debts. Debts don’t disappear into thin air. Our overly forgiving insolvency system and other tools designed to evade debt are nothing more than a highly effective machine for transferring wealth from strong businesses to weak businesses and undeserving people — a reverse Darwinian system which ultimately damages the whole economy.

You want to know how long I think bankruptcy should last — a period which the 2002 Act reduced from three years to less than a year. You provide a box for me to write anything from ‘immediately’ to ‘never’. I could just tick the last box, but this is what I really think: anyone entering bankruptcy should have their debts converted into something akin to a student loan, which lasts as long as it takes for the bankrupt to repay his debts with interest. He would be able to earn small amounts of money without bothering about repayments, but once his earnings exceeded, say, £20,000 a year, he would be obliged to start paying his creditors a proportion of his earnings.

Would that make Britain a bad place to do business? Absolutely not. It would be a far better place to do business if you knew your customers had less incentive to declare themselves bankrupt and you had less chance of being driven into bankruptcy yourself when a company you supply wriggles out of its debts.

Finally, you ask me whether I agree or disagree with the statement ‘Bankruptcy is socially acceptable’. Even a decade ago, it would have been unthinkable that anyone would even have asked this question.

Sadly, I feel you are now going to keep sending me these questionnaires until I say ‘yes’. But I am not going to: not this time and not ever. The government’s campaign to destigmatise bankruptcy is rewarding the feckless at the expense of the rest of us.

I remain, Sir, your obedient taxpayer,

Ross Clark

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