Check out our latest article on Avoid Bankruptcy

Article by Jane Calhoun

If you’re facing a major debt burden, you will probably consider bankruptcy as the best option you have to get out from under. But realistically, you shouldn’t consider bankruptcy as your first choice, but your last. Can you avoid bankruptcy by using debt management tactics, and get yourself back on a good financial footing?

Simply put, the answer is yes. In filing personal bankruptcy, keep in mind that you may not be able to avoid all of your debts. For people with regular income, the court will set up a repayment plan under Chapter 13 bankruptcy. Such a plan is probably similar to a plan you could set up yourself by working with lenders. Why file for bankruptcy, if you don’t have to, and can repay your creditors without it?

Talk to your lenders, to work out a plan as much as possible. Start with your secured lenders, such as car and mortgage lenders, to keep your vehicles and your home if possible. Leave your unsecured creditors until last. Check out some free websites offering debt snowball software to help you set up a sample repayment plan on your own.

When you are not working however, this is a case where you might consider filing for bankruptcy. Without a job, you can’t easily pay your debt so you would file for Chapter 7 bankruptcy allowing you to discharge debts. This may mean that you also have to sell your house or cars, depending on the state where you live. Before you file though, and even if you do not have steady income, it still may be possible to discuss how to repay your lenders, as they don’t want to see you discharge debts in bankruptcy either. Try to get temporary holds on payments until you can find work again again.

When building a debt management plan, start with your housing, food, and utilities, to keep the lights on and a roof over your head. After that amount is taken care of, try to make payments on secured loans in order to hold on to your home and any cars if you need them. Finally, after those are all taken care of, then you can consider repaying your unsecured creditors, who will likely be credit card companies. Note that for student loans, the student loan agencies can work with you to reduce or stop payments temporarily.

If all of these steps fail, you may have no choice but to file personal bankruptcy. But that should always be left as your last option. Try first to stick with a payment plan, and make larger payments once you are working steadily or have additional income.

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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.