More dodging credit card debt through bankruptcy

People are increasingly likely to declare bankruptcy rather than enter voluntary agreements with credit card providers to repay their debt.

10:06 08 November 2004

Those in financial trouble are increasingly likely to declare bankruptcy rather than enter voluntary agreements with credit card providers to repay their debt.

That is according to a report into the credit card industry by consultants PriceWaterhouseCoopers, which added that changes to the law has prompted this increase in bankruptcy.

"There is a danger that consumers will choose bankruptcy over schemes of arrangement, which could reduce future recovery rates on delinquent balances," said Richard Thompson, partner at PWC.

There has been a 29 per cent jump in the number of bankruptcies in the three months following the introduction of the new Enterprise Act in April, the consultants report.

The new legislation means that many people are having their bankruptcies discharged after six months, rather than the three years that was typical in the past - although the maximum bankruptcy period has also been extended to 15 years.

As well as an increasing tendency to enter into bankruptcy to avoid credit card debt, PWC also noted that credit card customers are juggling their debt to avoid repayments.

"The widespread holding of multiple cards and the availability of [zero interest] balance transfers mean that consumers in financial difficulty can avoid delinquency in the short-term by transferring debts between various accounts," Mr Thompson said.

This increase in the number of people avoiding debt repayments could have consequences for the rest of the industry; as - if credit card companies see a significant increase in the 2.4 billion of bad debt they currently write off - then interest rates on cards will rise and the availability of interest-free balance transfers could be reduced.