How people become bankrupt - twice

Kerry Katona’s second bankruptcy isn’t that uncommon, according to experts, but how is this possible?

Troubled reality television star Kerry Katona has been declared bankrupt for the second time in just five years.

And she’s not the only high-profile television star whose finances have crashed more than once. Fellow 'I’m a Celebrity' winner Joe Swash was declared bankrupt earlier this year, after being bankrupt first-time round in 2009.

Nearly 7,000 people were declared bankrupt in the first three months of this year alone. It’s not known how many of these have been bankrupt before but it’s not unusual, according to Steve Rees, managing director at debt consultant Vincent Bond.

“There are a number of reasons why someone can easily fall back into the debt trap again... Getting yourself into debt is easy, getting yourself out of it is very hard– the biggest thing you need to learn is how to change your behaviour so it does not happen again,” he said.

After being declared bankrupt, any assets can be used to pay creditors, but remaining debts are written off.

As long as certain conditions are met, the bankruptcy usually lasts a year. In theory this offers a chance to start afresh in 12 months. But in reality, it’s not nearly that easy.

Life after bankruptcy

In many cases people are even more vulnerable and financially excluded than they were before being made bankrupt.

There is still a great deal of stigma around bankruptcy and money problems, according to Melanie Taylor, of the Debt Advisory Centre.

“The ramifications are more wide-reaching than many realise,” she commented.

The mark of bankruptcy stays on your credit record for up to six years, and is incredibly inhibitive.

After you have been made bankrupt your current account will normally be withdrawn, and you will then find it difficult to get any bank account at all. This renders everyday habits problematic, including paying bills and being paid by an employer - this can easily affect employment prospects.

A poor credit record restricts more than your access to money. You are credit checked when you buy insurance, when you apply for mobile phone contracts and even when you try to move into private rented accommodation.  You’re also likely to be forced to pay for utilities on a pay as you go basis.

And if you do need to borrow money, the majority of mainstream lenders will turn you down.

This could lead many to turn to expensive payday lenders, which often claim to provide money without any credit checks at all, opening the potential to kick-start a new cycle of debt.

You also don’t need credit to rack up debt to the most common creditor: the taxman. Those who are employed have their tax deducted at source. But those who are self-employed and freelancers are required to fill-in a self-assessment tax form and pay tax at the end of the year. If you spent all your earnings or didn’t hold enough back for HMRC, you could find you’re in trouble.  

Overall, there’s no simple explanation of why anyone goes bankrupt the first time or second time round – there will usually be a number of factors involved.

But it stands to reason that someone who hasn’t budgeted or managed their finances in the past is prone to making the same mistakes again, unless they are provided with guidance and education.

More education needed?

Yet many don’t get the help vitally needed at such a vulnerable time. But while there are plenty of charities and organisations that offer free budgeting and financial help, when someone is declared bankrupt they may not necessarily know or choose to use these resources.

“The support available for people coming out of bankruptcy is limited, with discharged bankrupts largely expected to figure it all out for themselves. This may be a touch point in people’s lives where they can be taught to manage their money wisely and hopefully avoid debt problems in the future,” said Paul from the National Debtline.

 “However it is important to note that often debt problems are not simply a result of financial mismanagement but more of a complex set of circumstances, many of which will be out of the control of the individual concerned. As such it is not always possible to prevent bankruptcy happening again, but much more can certainly be done to help.”

Proposed reforms in Scotland will mean people who are made bankrupt will be required to undertake education as part of the order.  But these measures are not being considered in the rest of the country.

You can free money advice and debt support from:
The National Debtline
StepChange debt charity
Citizen’s Advice