The catch-22 blocking bankruptcy

Three of the country's senior judges have refused to close a catch-22 which is pricing thousands of potential bankrupts out of bankruptcy, but called on the Government to resolve the anomaly.

The problem exposed by Lightfoot v The Lord Chancellor, 23 July 1999, is that before anyone can go bankrupt, they must put up £250 as security for the official receiver's costs in bankruptcy proceedings.

However, the bulk of those wishing to go bankrupt, by virtue of their situation, cannot find the £250 and so cannot go bankrupt.

The Court of Appeal refused to outlaw the rule, but left no doubt about the extent of the problem.

Lord Justice Simon Brown said 20,000 bankruptcy orders are made each year, more than half on petitions presented by debtors themselves who had to find the £250.

"The benefits of such orders are plain. Their immediate effect is to release the debtor from the bailiff's knock on the door," he said.

However, he said that as the great majority of those wishing to petition for bankruptcy could not raise £250 and they were denied "the importance of the rehabilitation of the individual insolvent".

"They face instead a lifetime of unrelieved indebtedness," he said.

But the court dismissed an appeal by a woman with debts of £60,000 who wants to go bankrupt but cannot afford to, against an earlier High Court decision upholding the £250 rule. It was argued that the £250 rule priced people out of a constitutional right and should be outlawed.

But the court held that it did not.

Lord Justice Brown, who was sitting with Lords Justices Chadwick and Rattee, said it was not difficult to recognise the hardship and worry that many would suffer by being priced out of bankruptcy.

However, this did not make the rule unlawful.

In what is viewed as a plea to the Government to step in and make the bankruptcy option easier to obtain, he said that in the "more compassionate times in which we now live" he hoped fresh consideration could be given by the Government to the rule and that a fresh balance could be struck in the future.

Karen Ashton of the Public Law Project, who acted for the would-be bankrupt in the case, says: "It is a catch-22, where people whose only way out of a serious debt problem which is often not of their own making – particularly those caught in the 1980s trap with housing and negative equity – don't have a way out.

"There is, of course, the alternative procedure of administration orders, but they are only available for those whose debts are up to £5,000.

"In other words this option is only open to quite a limited category of people."

Administration orders are not available for those with serious debts, particularly those who have negative equity.

Ashton explains: "When it comes to ordinary court fees, people have the remission or waiver possibility automatically if they are in receipt of certain means tested benefits.

"The discretion is there for fees to be waived or reduced on the grounds of financial hardship. But there is no similar remission or waiver available with the bankruptcy fees. Basically, people are blocked from bankruptcy because they have to pay before they lodge the petition and cannot get the money to do so.

"I have spoken to a lot of debt advisers and am told that this really is creating a huge problem.

"And it is a problem which can have far-reaching and serious consequences for those involved in terms of illnesses, depression, family breakdown and the other problems that are associated with the pressure of debts.

"Personally, I think there are two things that have to be done. One is to change the ceiling on administration orders so that more people can use that route.

"The other is to introduce the remission and waiver feature that is available for court fees. In terms of immediately relieving the pressure this could be quite easily done.

"Introducing remission and waiver could be done by secondary legislation. The power is already there in the primary legislation.

"Something does need to be done as soon as possible though.

"Compared to 50 years ago we do have a different category of debtors, we can call consumer debtors.

"It's not just a commercial, business problem. It's something that in fact a lot of ordinary people suffer from. Development of credit is something that has changed dramatically over the past 50 years and this has led to the sort of financial problems which led to this case."