Alternatives to Bankruptcy
For many people bankruptcy is the right way of dealing with personal debt problems. However before you make the decision to go bankrupt it is important that you also consider the alternatives. This will help you to satisfy yourself that bankruptcy is the right solution for you.
It is important to understand that none of the alternatives should be seen as any better or worse than bankruptcy. They are simply different and have different implications. As such whether or not one of the other debt solutions is a better or worse option for you will depend on your specific financial circumstances and attitude to repaying your debt.
BE Tip: 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 to you locally.
Debt Consolidation is often the first option that you will consider if you believe you have a debt problem. Consolidation is the practise of paying off multiple smaller debts with a single loan. It is possible to consolidate multiple debts using either an unsecured loan from your bank or by taking a further mortgage or secured loan against your property.
However with the onset of the credit crunch at the end of 2008 it has became far more difficult to borrow to consolidate debt. To find out more about this debt solution please follow this link: Debt Consolidation
Debt Management Plan
A Debt Management Plan (DMP) is an informal agreement with creditors to reduce the monthly payments you make to your unsecured debts to a more manageable amount.
A DMP allows you to reduce your unsecured debt repayments so that they fit into the budget that you can afford. However your creditors do not automatically agree to write off money for you and you will have to continue to make payments into the DMP until your debts are repaid in full unless you are able to offer a lump sum to settle them early. To find out more about this debt solution please follow this link: Debt Management Plan
Individual Voluntary Arrangement (IVA)
The Individual Voluntary Arrangement (IVA) is seen as the direct alternative to Bankruptcy. If you start an IVA you will normally have to make a monthly payment towards your debt based on what you can afford for a period of 5 years. After that time any outstanding debt will be written off.
It should cost you nothing to start an IVA. There should be no upfront costs and you are simply obliged to pay your agreed monthly payments. If you are a home owner you will be able to keep control of your property although you may have to agree to release some equity from it for the benefit of your creditors if possible. To find out more about this debt solution please follow this link: Individual Voluntary Arrangement
Debt Relief Order
A Debt Relief Order (DRO) is a debt solution designed to help you if you have no means of repaying the debt that you owe. This is normally because you are on a low income and have little or no assets. It works in the same way as Bankruptcy in the sense that once the solution is in place all your unsecured debt is taken away from you. However the main difference is that you no longer have to pay anything towards your debts.
If you fit the required criteria you can start a DRO. As long as your circumstances do not improve then after 12 months your debts will be written off and you will be debt free. To find out more about this debt solution please follow this link: Debt Relief Order
**Update** On the 1st October 2015 the main criteria required to start a Debt Relief Order changed. The total unsecured debts allowed increased from £15,000 to £20,000. In addition your assets (not including your car) must be worth no more than £1000 (up from £300). You cannot be a home owner. You car must be worth no more than £1000 and your maximum surplus income after reasonable living expenses must be less than £50.
An Administration Order is a way to deal with debt if you owe less than £5000 and already have a County Court Judgment (CCJ) against you which you cannot afford to pay in full. It is a formal, legal debt solution which means it is approved by the court and your creditors have to stick to it once it is in place.
You need to have a regular income with some spare income which can be used to make a single payment towards your debts each month (paid to your local court). The court will divide this money between your creditors.
Technically speaking an Administration Order will last until the debts are cleared and the court fees paid. However the Court can order that you only pay a proportion of your debts where you cannot pay off all your debts within a ‘reasonable time’ which is normally considered to be three years. After this time the Order will end and the any debt included in the Order which remains unpaid will be written off. To find out more about this debt solution please follow this link: Administration Order
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