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Debt Management Plan or go Bankrupt – Which should you choose

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Debt Management Plan or go Bankrupt – Which should you choose

Debt Management Plan or go Bankrupt – Which should you choose

A debt management plan might sound better than going bankrupt. But it will usually leave you facing many years of monthly payments. If you go bankrupt, you could be debt free in 12 months.

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The benefits if you go bankrupt over a debt management plan?

An average debt management plan (DMP) can last for 8-10 years. Your monthly payments have to be maintained until all your debts are paid or settled in full. In contrast, you may be surprised to learn that bankruptcy lasts just 1 year. Often you will not be required to make any further ongoing monthly payments at all.

This is because when you are bankrupt, you don’t have to make any further payments towards your debts unless you can afford to. If you have no surplus income you pay nothing more. If you do have a surplus, you will have to pay this towards your debts. However the payments only last a maximum of 3 years.

You can also include debts that you will have to leave out of your debt management plan. For example, money you owe to HMRC, Gas, Electric and council tax arrears are all included and written off.

Bankruptcy is no worse for your credit rating than a debt management plan. Arguably it is actually better. The record does remain on your credit file for 6 years. However you can start improving your credit score after 12 months. After 6 years you will be able to apply for a high street mortgage. This will not be the case if you are still paying off your debts through a debt management plan.

Nowadays if you go bankrupt there is no stigma. No-one you know will find out. It is just a private as being in a debt management plan. The only stigma is the thoughts in your head.

What are the downsides of going bankrupt v a DMP?

Bankruptcy can be an ideal option if you live in rented accommodation as the landlord’s property is not affected. However, it may be unsuitable if you are a home owner. Where you have equity, your property could be at risk and you may well be better off with a debt management plan.

If you get a windfall during the year you are bankrupt, (for example inheritance or a injury claim pay-out), you are likely to loose it. However in a debt management plan you can keep the cash. As such this would be a better option if you know you are likely to come into money in the next 12 months.

Your car will be at risk if you own it outright and it is worth more than £1250. If it is worth a lot more, you may be better off with a DMP. If your car is on finance, you can keep it as long as you keep up the payments, the amount you owe is more than the 2nd hand value and the finance company is happy to maintain the agreement.

The application fee for bankruptcy is currently £680. You might be able to borrow or save this. But if you simply can’t get the funds together, a debt management plan, which is free to start, could be a better option initially.

Can you go bankrupt if you are already in a Debt Management Plan?

If you are already in a debt management plan, you might be thinking that going bankrupt could be a option better for you. If so, there is nothing to stop you switching solutions. All you need to do is cancel your plan by stopping the monthly payments. You are then free to go bankrupt at any time. The debt management company can’t stop you.

You will not be prevented from going bankrupt because you have been paying monthly into a Plan. It may well be the case that in reality you are struggling with the Plan payments or it will simply take you an unreasonably long time to become debt free. You are not be penalised for not wanting to continue to do this.

The process starts with completing an on-line application form on the Government website. If you need help with this don’t hesitate to contact us.

Once the form is completed and your fee has been paid you can submit. As long as the application has been completed properly and you have lived in the UK for at least the last 6 months, you will be declared bankrupt the next working day. You will then be contacted by the Official Receiver. They will normally want to interview you on the telephone.

It is important to get professional advice from an authorised debt advisor before making the decision to go Bankrupt. For a free no obligation chat, give us a call or complete the form below.

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James Falla
I have been advising people on how to solve their debt problems for over 20 years. During this time I have helped many people go bankrupt. I am an FCA Approved Person and the Managing Director of Wilmott Turner Financial Services (owner and operator of Bankruptcy Expert
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