Alternatives to Consider Before Bankruptcy
For many with spiralling debts, bankruptcy may seem like the best option. However, declaring yourself bankrupt does come with plenty of pitfalls. Not only will you lose all your assets, but all your bank accounts and any credit facilities you may own will be closed down. It can also have employment implications especially if you work in finance or plan to run your own business.
If you're considering bankruptcy then check out the alternatives first.
Individual Voluntary Arrangements (IVAs)
An Individual Voluntary Arrangement (IVA) is a legally binding arrangement, the purpose of which is to enable an individual to reach a compromise with its creditors. The compromise often outweighs what the creditor would receive if the individual were to be made bankrupt. It can be based on a lump sum offer or regularly monthly payments. If 75% or more of those creditors agree with the arrangement then it becomes legal binding between the two parties. IVAs tend to last between three and five years and are more flexible than bankruptcy. Debtors also have the opportunity to retain assets including property so long as they meet repayments; there are also fewer restrictions in place such as obtaining personal credit. An IVA can often work out best for both parties and should be considered before taking the bankruptcy route.
Informal Arrangements
Alternatively, you could seek an informal arrangement with your creditors whereby you agree to repay your debt at a reduced level. This tends to be suited to those of you facing temporary financial difficulty. It can often be difficult to get creditors to agree to this type of arrangement especially if you are in a lot of debt. However, this type of arrangement is ideal from a debtors point of view as it doesn't have such a detrimental impact on your future finances. The downside is that the agreement isn't bound by the courts so the creditors can opt out of the agreement at any time, they also tend to be short term - not ideal if your circumstances aren't going to change for the foreseeable future.
Debt Management Plans
Another way of dealing with your debt is to go through a financial agency that provides a debt management plan service. Debt management providers will negotiate a set monthly payment with your creditors on your behalf. The amount you pay a month will be based on how much disposable income you have, it is then distributed amongst your creditors. The advantage of using a debt management service is that you only have to make one single payment a month, as all your payments are handled by the agency. You may also save money as agencies tend to negotiate freezes on interest rates and charges on your debt, your creditors may also stop further action such as taking you to court. Unfortunately, debt management plans can only be used to pay off unsecured debt. You may also have to pay a fee to the debt management firm handling your finances.
Administration Orders
Finally, if you owe less than £5,000 in total to two or more creditors and have one County Court judgement against you then an Administration Order is a good option. This option allows you to make one single monthly payment to your nearest County Court, who then distribute the money to your creditors. Taking out an Administration Order prevents your creditors from hassling you, which means phone calls, visits and letters will stop, leaving you to focus on repaying your debts at your own pace.
Related Articles:
- Who Should Consider an IVA
- IVAs - The Good and the Bad Points
- Bankruptcy or an IVA?
- IVA Benefits and Drawbacks
- Brief Bankruptcy Guide
Site is for information only and does not constitute financial advice. E&OE.
