£700 to go bankrupt

A rise in the cost of going bankrupt could discourage people with financial problems from seeking a solution, debt experts are warning.

The fee for petitioning for bankruptcy has gone up by £75 to £525. With the court fee added on, the total upfront cost is £700.

The deputy head of the Insolvency Service, Graham Horne, says the increase is needed to "cover the overall cost of administering the service".

The charges, including court fees, have gone up by 37% since March last year.

A leading insolvency practitioner, Mark Sands from RSM Tenon, warns that the hike would put extra pressure on individuals who are likely to be under stress or depressed.

"So many people flounder around and don't see a way out," he says, "They are going to be put off exploring bankruptcy as a solution."

The £525 charge is a deposit to cover the cost of managing a bankruptcy, which allows the bankrupt to throw off the burden of debt and make a fresh start.

The Insolvency Service recovers a full administration fee of £1,715, less the deposit, from the bankrupt's assets or surplus income at a later stage. This sum is not being increased.

"The fee is staying the same," argues Graham Horne, "But we are increasing the proportion of that fee which we get on day one."

The Insolvency Service has seen its income squeezed because of the falling value of homes and other assets which are recovered from bankrupts.

Currently, the £1,715 fee is never fully paid in half of bankruptcies.

"It's unfair to families who are struggling," said a recent bankrupt who spoke to BBC News, although he added, "I felt that any money I had was going to be taken anyway."

"This increase in the cost of going bankrupt is likely to swell the numbers of people falling through the net of the current insolvency regime," comments Jon Elwes from the Money Advice Trust.

"Our advisers at National Debtline speak to people everyday for whom bankruptcy would be the best solution to their debt problem, but for the fact they can't afford the associated fees."

There is now a cheaper and easier alternative, the Debt Relief Order or DRO, which costs only £90.

An increasing number of people in financial trouble and looking to escape their debts have been avoiding bankruptcy and taking this lower cost route.

In the first quarter of this year there were 6,788 Debt Relief Orders, a 20% rise on the previous year.

But you can only ask for a DRO if your debts are under £15,000 and your savings and assets are less than £300.

"What if you have £16,000 of debt?", asks Mark Sands of RSM Tenon. "You're faced with that barrier of hundreds of pounds before you can opt for bankruptcy to resolve your difficulties."

"It's a very steep rise," adds Una Farrell from the Consumer Credit Counselling Service.

"We already have to do a lot of work helping our clients to get the money together to pay the fees."

But Graham Horne says the Insolvency Service is obliged by parliament to break even, a task which has become increasingly difficult.

"It has always been our policy that if bankrupts can pay something towards their debts then they should," explains.

"And we have to strike a balance between giving bankrupts debt relief and a fresh start, and the need to provide some return to creditors."