The bankruptcy loophole: is a quick fix to pay debt worth it?

Bankruptcy is one way to avoid repaying your student loan. Jennifer Farrar and Bethan Hempstead ask: is there a hidden cost?

Imagine being able to clear your student debts in one fell swoop. No more monthly repayments to the Student Loans Company to worry about. As bonkers as this sounds, it is a very real possibility at the moment, thanks to a legal loophole that allows students who started university from 1998 onwards to write off their student loans by bankrupting themselves.

According to official figures, more than 600 graduates have already declared themselves officially bankrupt at a cost of more than 2.4m to the taxpayer. Yet the Government has admitted that there is nothing it can do if other students want to follow suit until sometime next year, when the Education Bill 2004 will sew the loophole firmly shut.

But as training to be a lawyer can involve four or five years of higher education, law students are likely to leave university with higher levels of debt than most graduates. And while it is true that anyone with a training contract or pupillage will quickly earn a decent salary, and therefore will not have to consider bankrupting themselves, there are many wannabe lawyers out there who will just not be able to pin down a traineeship and will be left floundering beneath the burden of their tuition debts.

Arguments in favour of bankruptcy have also been prompted by measures contained in the 2002 Enterprise Bill, which could see the automatic discharge period for bankrupts reduced from three years to one, meaning that the stigma attached to bankruptcy could also be decreased.

So should they consider bankruptcy as a way to clear the decks and start again?

As tempting as it sounds, the answer from insolvency experts and employers to the bankruptcy dilemma is a resounding no, due to the long-term repercussions it brings.

John Verrill, head of the banking and corporate recovery team at City firm Lawrence Graham, says it is not a good or a clever idea for someone intent on entering a profession such as the law. I dont think it would be well regarded, he adds. Theres a risk of blacklisting, regardless of the merits or demerits of your bankruptcy. You also come across as someone whos not very good at handling their affairs.

Law students who are considering bankruptcy should seek several independent opinions before taking any action, warns Amy Brown of the Consumer Credit Coun-selling Service. People dont feel theres so much of a stigma associated with bankruptcy anymore, but its not something to be taken lightly, she says. Talk to all your creditors and keep your bank informed. There might be other ways around the problem.

The National Union of Students (NUS) is also advising its members to seek legal advice rather than take such extreme action, although NUS president Mandy Telford thinks it is not surprising that students are being driven towards bankruptcy.

Despite Government rhetoric on earning power after graduation, the reality is that many can see little or no light at the end of the tunnel of debt, says Telford. Bankrupt-cy may seem like a good short-term measure, but the repercussions can last for years.

Although it has been reported that some lenders now regard someone who has declared themselves bankrupt as a better credit risk than someone who is struggling with an enormous student debt, Verrill at Lawrence Graham warns wannabe lawyers away from this option at all costs. You want to look like an attractive proposition to employers. [Declaring yourself bankrupt] just seems like quite a cavalier thing to do, particularly if you are entering a career like law. And the last thing this profession needs is more cavalier lawyers, he commented.

What the students say
Matt Taylor, ex-president of Newcastle University Law Society
“My friends and I discussed the possibility of writing off student loans by declaring yourself bankrupt and I think we all saw the appealing side to it. However, the consequences in the long term do limit this as an option. I hope to have a successful career as a solicitor and want to be able to take out a mortgage and buy items on credit. Although I might only be classed as a bankrupt for a year, I think it would severely restrict my options. So although bankruptcy initially seems like an attractive way of clearing student debt, I think the long-term disadvantages will prevent the majority from having the guts to go for it. But I wish those that dare the best of luck.”

Kelly-Marie Power, a second-year law student at Cardiff University
“I wouldn’t consider declaring myself bankrupt to clear my student loan or other debts incurred at university. I don’t want to affect my chances of securing a home, a car or anything else that needs credit, by being blacklisted. There’s also the chance it may ruin my chances of obtaining a training contract or job in the legal profession. Although in theory it might sound tempting, it’s a risk I wouldn’t be prepared to take.”

Sam Skelton, third-year law student and president of Leeds University Law Society
“At a time when you can expect to graduate with a horrifying level of debt, it’s not surprising that students are looking for a way of discharging what may seem like a crippling burden at such a young age. Combined with the expense of taking the LPC or BVC, the appeal of bankruptcy is obvious. “But the negative aspects are less widely known. Because the Enterprise Act 2002 reduces the stigma attached to bankrupt individuals, it appears to give the green light to students and produces a real possibility that many will declare themselves bankrupt. But I’d suggest that declaring yourself bankrupt – even if it was later discharged – would make it extremely difficult to find any job that involves handling clients’ money. “It’s not surprising, then, that I’d never see bankruptcy as a viable solution to student debt. Neither do I know of any other law student who’s given more than even a passing thought to this idea.”

Helen Ahern, Exeter University law graduate
“Declaring yourself bankrupt does seem attractive, but I wouldn’t consider it be-cause of the problems that may arise in the future. It’s undoubtedly a quick way to get out of debt and an understandable option in the short term, but the long-term stigma would put me off. But if lots of students take such action to clear their debts, the stigma will gradually be lost. If the loophole still exists and top-up fees are introduced, it may become an attractive option.”