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Case Study – Bankruptcy

John’s Story

  • John F was a 35 year old divorced man, who lived alone in a two bedroom terraced house in the West Midlands. He purchased his home in 2007 following his divorce from his wife Sarah. They had one child, a daughter, for whom they had shared custody. As part of their informal custody agreement, she usually lived with John for part of the week and on alternate weekends.

    John worked in the car manufacturing industry and had done so since leaving school. Although his basic wage wasn’t much to write home about he had always earned well at the end of the day. His employer paid a series of overtime hours and bonuses every week and he had worked for the same company for a long time and had moved slowly up the ranks over the years.

The Finances

  • John’s finances were not a problem when he was married to Sarah. They were both earning steady money and had a joint mortgage on a three bedroomed semi-detached house close to where John now lives. Between them they had built up a number of loans and a few large outstanding credit card debts over the years. John consolidated these debts into a larger personal loan a year before they divorced to ease the pressures of paying them off. They also borrowed more money than they needed at the time to pay for a special family holiday. John also had a Hire Purchase agreement on his car which he had purchased second-hand a few years previously.

    When John and Sarah divorced, however, money got a little tighter for John. They sold the family home and divided the equity that they had built up in it over the years to use as deposits for a new home for each of them. They would then take on their own mortgages for each new property. Apart from one credit card, all of the couple’s debts were in John’s name within the personal consolidation loan so he took that with him out of the marriage. He also committed to paying Sarah a small amount every month in child maintenance. She did not get the CSA involved as their daughter lived with John on a half-time basis where he covered her everyday costs and she was aware that he had taken on responsibility for their past joint debts by taking on the loan in the first place.

    At this stage John was coping with his money OK. Once he had paid his mortgage and made his HP, loan and maintenance payments every month his spare money was a bit tight. But, he wasn’t in the habit of over-spending in any case so he rubbed along OK generally on his basic wages and overtime and bonus payments.

The Problem

  • The car manufacturing industry was hit hard by the credit crunch and even harder by the impending recession. The company John worked for moved very quickly from doing well to sliding into a slump. John initially had to take on less overtime and as time progressed was paid no more bonuses as the work just was not there for his plant. He eventually ended up working a standard week for his basic wage as all overtime was cut. And, then, his company announced that it would be making a series of redundancies and all workers who remained with them would have their basic hours cut and would not be able to work a full standard week or to be paid for full-time work.

    This had a drastic effect on John’s finances. He went from having enough money to pay his essential living costs, make his mortgage, loan and HP payments with enough over to live on to not having enough money to cope from week to week. He began to rely on using a credit card to pay for essential items and living costs.

    Soon, however, this was not enough. John found that one month he could pay his mortgage and his loan repayment but he could not make his Hire Purchase repayment or pay his credit card bill. Over the next few months his credit card company and the HP firm started hassling him for the arrears that he had built up so he missed some mortgage payments to try and sort out these arrears to get his creditors off his back. Eventually all of John’s credit accounts were in arrears and he did not know what his options were. At this stage, apart from his mortgage, he estimated that he owed close to £50,000. He had no idea what he could do to sort his financial problems out both in the short term and in the future.

The Solution

  • John considered taking out a debt management plan but, given his current low income, decided after doing some research that he could not offer high enough monthly repayments to make this worthwhile to his creditors. Plus, the time it would take to actually make any in-roads into paying off his debts this way would look more like decades than years. He went online to get some debt advice and, having talked to a counsellor and discussed his situation, decided that a bankruptcy route might be his best solution. Given that he had no idea when his salary situation would improve, if indeed it ever would, he could not see another option that suited him as well.

    John’s advisor was keen to stress to him that declaring himself bankrupt did not involve the stigma that it one had and that, over time, he could make a complete financial recovery. John was prosaic about the fact that he would have to give up his home. He had not, for example, lived there long and had not had a chance to build up any significant equity in it in any case as prices in his area had dropped over recent months.

    His brother who also lived locally offered John the chance to come and live with him and his wife whilst he got back on his feet again. This was actually an ideal solution as his brother worked in the same plant as John and the rent he could pay them would come in useful for them as well. So, John had no worries about where he would live once the process started and he had to leave his home.

    John’s advisor talked him through all the negatives that a bankruptcy might mean for him before he did anything else. A lot of the points here did not apply to John in any case and his employer was more concerned about his situation than judgemental. He assured John that declaring himself bankrupt would have no negative impact on his job. John was warned that during his bankruptcy term of a year he would be unable to apply for significant credit (if any) and he would have restrictions placed on his banking practices and spending by the Official Receiver.

    John had no problems with any of this. As his advisor pointed out most restrictions he went through here would only last for the short-term and, although his bankruptcy would go on his credit history for a number of years this did not mean the end of the world. He also would not be expected to make any significant payments from his wages as they were currently so low although that could change during the term of his bankruptcy if things picked up at work. And, once John was discharged from his bankruptcy order after the year was done all of his remaining debts would be wiped off.

    John’s advisor helped him to put forward his bankruptcy petition and to sort out all the details about his finances and his debts. He told John exactly what he could be expected to keep and what would need to be sold to go towards paying off his debts. With the bankruptcy order in place John handed back the keys to his house and his car, took the possessions he was allowed to keep to his brother’s home and essentially started a new life.

John Today

  • John is still living with his brother and sister-in-law – an arrangement that suits all them just fine at the moment. They have no children of their own and John’s daughter still spends part of the week and alternate weekends with her father.

    The bankruptcy period is almost over for John now which will be a relief although he has not found it to be a problem as such. He has spent carefully and has managed on his income. He had a chat with his bank shortly after he petitioned for bankruptcy and he found them to be sympathetic and very helpful in terms of giving him advice, helping him change his accounts and telling him where he would stand once he was discharged from his bankruptcy.

    John plans ultimately to rent a flat once things pick up at work. He does intend to buy another property at some stage down the line but is aware that he might be better waiting a while and building up his credit record again to show lenders that he is no longer a risk to them.

    As John says: ‘I know a lot of people think that going through a bankruptcy is the end of the world, but I like to look on it as a fresh start in life. I think that I was unlucky to get into so many debt problems. If things had happened differently then I’m sure I’d have been OK but I just got caught up in what was happening with the recession and the economy. At the end of the day I was actually pleasantly surprised at how hassle free the whole process was and once it’s done I’ve got a clean slate and I can start again from scratch. I got really wound up by the situation at one stage. I felt ill and couldn’t sleep as I was so worried about how I was going to pay everything off. Things look a lot better where I am now.’
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