How to avoid bankruptcy – Alternatives to bankruptcy in the UK

2009 saw a record number of personal insolvencies in the UK. Yet this did not result in bankruptcy for all. Not even for nearly all. Why? Well, simply put, the UK now offers alternatives to bankruptcy that actually mean even those in incredibly dire straits can salvage their financial situation without resorting to what is commonly seen as the ultimate financial defeat. Here are some of the options available.

Debt Management Plan

The Debt Management Plan is a more informal alternative to bankruptcy for many. No statistics are held on the insolvency register for this and it is not a legally binding contract. However, many people in the UK opt for a Debt Management Plan as a means of avoiding bankruptcy. A DMP is an informal arrangement between a debtor and his or her creditors. Often, the agreement is negotiated with the assistance of a specialist debt company, who will take into account the debtor’s income, outgoings and debts before proposing a repayment plan (often amounting to significantly less than the total debts owed). If the creditors accept this, then the individual pays the debt management company an agreed amount each month, which the company then distribute as applicable between the creditors. This goes on for an agreed amount of time, at the end of which the debts are considered settled. The main disadvantage of such an agreement is the fact that it is quite informal. This means that the creditors arein no way legally obliged to agree and could change their mind at any point.

Debt Relief Order

The Debt Relief Order is the newest alternative to bankruptcy, introduced by the British government in April 2009. It is an order issued by the British Insolvency Service and means that you enter into a 12 month ‘plan.’ During this 12 months, you pay nothing and at the end of it you are considered clear of all debts it was applied to. Seems too good to be true? Well, there are tight eligibility criteria as the Debt Relief Order is designed for those with the tightest finances. In order to be eligible, you must have total debts amounting to less than £15000 (owed to multiple creditors) and assets amounting in value to no more than £300. In addition, the debtor’s total disposable income (after living expenses are deducted) must amount to no more than £50 per month. If you meet all these eligibility criteria then you can apply for a debt relief order. However, if your financial situation changes during the course of the 12 months of the DRO, you will be expected to declare this and make arrangements to repay debts where applicable.

IVA

The IVA, or individual voluntary arrangement, is another government set alternative to bankruptcy. This is similar to a debt management plan insofar as it involves an agreement between the debtor and the creditors. The agreement is often a repayment over a set period of time (usually 5 years) amounting to significantly less than the debtor actually owes. The interest is also often frozen. The main difference with the IVA is that it is a formal and legally binding agreement. It can only be negotiated by a licensed insolvency practitioner and in most cases, the debtor is prohibited from taking credit out during the course of the IVA. However, the benefit of such a legally binding agreement like this is that providing creditors to whom you owe at least 75% of your debt to agree to your proposed IVA, it goes ahead irrespective of the other 25%. This means some of your creditors could effectively be forced into taking a lower payment amount. The IVA is often for those who owe £15000 or more to at least three different creditors.

All three of these alternatives to bankruptcy do show up on your credit record and could easily affect your long term ability to obtain credit. However, unlike bankruptcy, none of these are reported in the local press.

Of course, not everybody will be eligible for these solutions and this is indeed why so many people are forced into bankruptcy each year. However, if you are in a financial situation where you feel you may be forced into declaring yourself bankrupt, investigating the alternatives should be a priority.