The Stigma Associated With Bankruptcy

15th May 2014

So far the take-up of debt settlement arrangements has been comparatively low. The system is struggling to become effective with a lack of understanding at the core of the problem. Debtors are unfamiliar, creditors concerned about the outcomes in terms of debt write-offs, and the professional intermediaries (PIPs) naturally lack some confidence given how new the process remains.

Many people don’t even qualify to use a DSA, most commonly because their entire income is consumed by their regular household bills and expenses. This leaves nothing available to offer to creditors by way of a deal.

As the scale of personal debt problems in Ireland is extensive, you might think that bankruptcy numbers would be growing quickly. This process has recently been changed to become much less onerous upon the bankrupt. The numbers are growing in fact, but they remain incredibly low in comparison to the number of people with an unmanageable burden of debt.

Why do so few people decide that tackling their debts via bankruptcy is the way to proceed?

From the perspective of a debt adviser bankruptcy is often the ideal route forwards for a struggling debtor. There’s no negotiation with a reluctant bank, no concern about securing sufficient support from creditors to make a debt settlement arrangement work, no requirement to have surplus monthly income to pay into an arrangement.

This type of professional logic isn’t the most important factor here. The way that most members of the public view bankruptcy means that it’s just not an option many people are prepared to seriously consider let alone go ahead with.

Let’s review some statistics about perceptions taken from a 2012 survey in Scotland. A “trust deed” in Scotland works in a way that’s quite similar to a debt settlement arrangement in Ireland. Here’s what a large sample of Scottish people that had experienced major debt problems thought about their options:

It’s very obvious that, for the majority of people, these two forms of debt relief in Scotland are seen in very different ways. Four times as many people see bankruptcy as being something to be hidden, perhaps to be ashamed of or embarrassed about. However, both are formal insolvencies with the associated public records and other generally similar consequences. People see a trust deed as being more of a fair compromise with their creditors, despite the fact that they’d likely contribute the same amount of money into either solution. More than twice as many people see bankruptcy as a last resort, despite the fact that most debt advisers would suggest their clients consider any type of personal insolvency as being a last resort.

There’s a stigma associated with bankruptcy that, based on cold hard logical thought processes, isn’t easy to explain. It’s very real in the minds of people though, and it cannot easily be tackled. We suspect a similar survey in Ireland might produce even more stark differences due to the historical legacy of an especially punitive bankruptcy process (now changed).

With this in mind it’s vital that politicians, regulators, personal insolvency practitioners and the banks work hard and fast to get the new personal insolvency system working. If people are trapped by debt, but they aren’t prepared to become bankrupt, the end result is helpful to nobody. People cannot pay back money that they don’t have and the banks cannot collect money that doesn’t exist.

Families trapped by debt are more vulnerable to health and wellbeing issues and cannot contribute to the economy in the way that they otherwise could. Social and economic costs flow from this, paid for by everyone else.

The stigma associated with bankruptcy is so embedded, and so powerful, that the new options (such as debt settlement arrangements) have to be made to work.