Alternatives to Bankruptcy
- 28 Nov 2021
Before making the decision to go bankrupt it is important to consider the alternatives. There are a number of debt solutions to consider.
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- Consolidation
- DMP (Debt Management Plan)
- IVA (Individual Voluntary Arrangement)
- Debt Relief Order
- Administration Order
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The alternatives described below apply if you are living in England, Wales or Northern Ireland. If you live in Scotland you should consider the solutions available locally.
Consolidation
Consolidation is normally the first option you think about if you are struggling with debt. It involves paying off multiple smaller debts with a single loan.
It is possible to consolidate multiple debts using an unsecured loan from your bank. Alternatively if you are a home owner you could remortgage or take secured loan against your property.
This solution is only sensible if you are able to borrow enough to consolidate all your existing debt for an affordable monthly repayment. If not it will usually result in you making matters worse in the long run
Consolidation only works if you can borrow enough to pay off all your existing debts and are left with monthly payments you can afford without having to borrow more.
Debt Management Plan
A DMP (Debt Management Plan) is an informal agreement with creditors. It reduces your monthly debt payments to an amount you can afford.
You can negotiate the Plan with your creditors yourself or use an organisation to help you. They may or may not charge a fee. The plan is relatively flexible meaning you can change the payments or stop paying it at any time.
A major downside of a DMP is you have to pay into it until your debts are repaid in full. There is no agreement for debt to be written off.
IVA (Individual Voluntary Arrangement)
An IVA usually involves paying a single affordable amount towards your debts for 5-6 years. However it is also possible to carry out this type of solution by paying a single lump sum with no ongoing payments.
Once the Arrangement is completed any included debt that remains outstanding is written off. As such it allows you to become debt free in a reasonable period of time.
If you are a home owner an IVA gives legal protection for your property. Nevertheless you may have to agree to release some equity from it for the benefit of your creditors if you can.
There is no up front fee if you start an IVA. You are simply obliged to pay your agreed monthly payments.
Debt Relief Order
A Debt Relief Order (DRO) is often described as a “light” form of bankruptcy. It provides the same outcome as bankruptcy but the application fee is significantly reduced.
It could be right for you if you are on a low income and have little or no assets. There is no requirement to make any further payments towards your debts and after 12 months they are written off.
Unfortunately a DRO is not available to everyone. Before you can apply you have to meet some strict criteria around the amount of debt you owe, the value of your assets and your disposable income.
Unlike Bankruptcy you cannot apply for a DRO yourself. You need to use an Approved Intermediary.
Administration Order
An Administration Order is one of the alternatives to bankruptcy if you owe less than £5000. In addition you must already have a CCJ issued against you.
Once in place you are required to make a single payment towards your debts based on your disposable income. In theory the the payments last until everything is repaid in full. However the agreement normally only lasts 3 years.
Because of the requirement to make a payment each month this solution has largely been replaced with the Debt Relief Order for those who qualify.
Want help to decide which solution is right for you? Give us a call (0800 044 3194) or complete the form below to speak to one of our experts