Alternatives to Declaring Bankruptcy

Published: 07th February 2012
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For people with serious debt problems declaring bankruptcy is perhaps the most well known solution. Although becoming bankrupt is a way to clear debts and start afresh it can also have a long term effect on a personís credit rating. In the UK however there are many different ways for people to restructure their finances and become debt free without resorting to bankruptcy. The most common alternatives include -
Debt Management Plans (DMPs)

Debt Management Plans, sometimes known as Managed Repayment Programmes, are used by hundreds of thousands of people each year to restructure their debt repayments. In a Debt Management Plan debts are consolidated so that only one combined repayment is made each month. The size of this payment is reduced and set at an amount that the individual can reasonably afford on their current income and essential outgoings. Typically payments will be made to a debt management company who will distribute the funds to the creditors on a pro rata basis. Debt Management Plans are an option for people struggling with unsecured debts such as personal loans, store cards and credit cards.

Individual Voluntary Arrangements (IVAs)

Individual Voluntary Arrangements are a debt restructure option designed for people with high amounts of debt. In an IVA debts are consolidated so that a single payment is made each month for a fixed period of time, usually five years. At the end of this period any remaining unpaid debt is written off by the creditors. IVAs however are only available to people who meet certain qualifying criteria. Generally for an IVA to be appropriate the person will need to have combined debts of at least £12,000 divided between more than one creditor.

Debt Relief Order (DRO)

Introduced in 2009, Debt Relief Orders are an alternative to bankruptcy for people on a low income and with few assets. They provide a way for a person to apply for bankruptcy without having to go through the full Court Bankruptcy procedure. As such it is a cheaper option than becoming bankrupt. Debt Relief Orders are however quite restricted on who can apply and so many people will not qualify. In order to qualify a person will need to have debts of less than £15000 and savings of no more than £300.

Scottish Protected Trust Deeds

Protected Trust Deeds are often seen as the Scottish equivalent to an IVA. As with an Individual Voluntary Arrangement a personís debts are consolidated so that a single repayment is made each month for a fixed period of time. Typically Trust Deeds will last for three years at the end of which the individual will be debt free. Once a person enters into a Trust Deed all interest and charges on their debts are stopped and they are protected from legal action from their creditors.

Full and Final Settlement

If a person has access to a lump sum of money making an offer for a Full and Final settlement may be possible. A Full and Final Settlement is an agreement for the debtor to make a one off lump sum payment in exchange for their creditors writing off the rest of the debt. Typically this is only an option for people who are able to re-mortgage, have significant savings or have saleable assets.

A person considering bankruptcy should always look at all their options and where approriate take professional advice. It may be that an alternative solution will offer a better option.

Spencer Hayes provides a free debt helpline for people in the UK who have financial problems. Our counsellors specialise in helping people to find an alternative to bankruptcy.

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