Home > Getting Out of Debt > Bankruptcy and the Alternatives

Bankruptcy and the Alternatives

By: J.A.J Aaronson - Updated: 31 May 2012 | comments*Discuss
 
Bankrupt Bankruptcy Individual Voluntary

The number of individuals filing for bankruptcy in the UK has sky-rocketed over the last decade. The increasing availability of credit and the banks' penchant for lending consumers sums which they simply can't pay back has meant that many debtors have been forced into corners from which there may seem to be no way out. If you are in this situation you may well be considering drastic options.

Bankruptcy

Bankruptcy is, indeed, a drastic option. This is a legal device designed for those who are incapable of paying their creditors. An individual can file (or 'petition') for bankruptcy, or one or all of their creditors can appeal for bankruptcy proceedings to begin against an individual, but the former is the far more common course of action.

Essentially, a bankruptcy order means that the individual in question is absolved of their responsibility to pay back their debts, which seems like a very attractive option. However, the downsides are manifold and serious. Primarily, in return for the writing off of your debts, you must give up some or all of your assets, with some exceptions such as tools if you are a tradesman. These go to your creditors in order for them to recover some of their money.

Furthermore, although rules state that a bankruptcy term will rarely last longer than 12 months, the damage done to an individual's credit rating is severe; bankrupts often find it virtually impossible to get credit from 'standard' lenders, and instead have to resort to expensive products offered to those with 'sub-prime' credit histories.

Individual Voluntary Agreements

There are alternatives to bankruptcy, however. Individual Voluntary Agreements, as constituted in law in 1986, have become increasingly popular in recent years. These are formal agreements which are drawn up by a debtor and a professional insolvency advisor, and which are then presented to the individual's creditors. IVAs are only applicable for unsecured debts; you would not, for example, be able to apply for an IVA if you couldn't pay off your mortgage.

An IVA means that the debtor can pay back what they owe over a longer period of time and, if the agreement is accepted by the creditor, there will be no interest or charges payable over the term of the agreement, which is normally 5 years. Furthermore, the creditor will stop contacting the individual during this term, which is particularly attractive for those who have felt hounded by pushy lenders.IVAs are not without their downsides, however. They will still have a devastating effect on your credit score, and they can be stressful for those involved - although not as stressful as bankruptcy. It is possible to apply for an IVA after having already filed for bankruptcy, but this means that the bankruptcy must then be annulled; this can be a long process, and so an IVA should always be the first of the two options to be considered.

In many circumstances, however, neither bankruptcy nor an IVA is the only option. You should remember that, if your creditor seizes your assets they will simply auction them off and will therefore make very little money from them. As a result they stand little chance of recouping their money, and so bankruptcy is not a particularly appetising option for them either.

A far better first step, therefore, is to speak directly to your creditors about your situation. In many cases you will be able to negotiate a payment plan which is acceptable to both of you, while avoiding any formal legal proceedings.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Latest Comments
  • MoneyExpertise
    Re: How Much Tax do I Have to Pay?
    Foley87 - Your Question:I'm working full time for a company and pay tax National Insurance a friend asked if I would like to…
    22 January 2018
  • Foley87
    Re: How Much Tax do I Have to Pay?
    I'm working full time for a company and pay tax National Insurance a friend asked if I would like to earn some money and help…
    21 January 2018
  • Amcm
    Re: What is SERPS and What Was 'Contracting Out' ?
    I opted out of serps after being advised by my insurer I have no idea if it is a good thing or not? Where…
    21 January 2018
  • Manxie58
    Re: How Much Tax do I Have to Pay?
    Hi, I returned from 7 years of working in Hong Kong. I have been unemployed since our return to UK in August. I have been living…
    20 January 2018
  • Trout
    Re: How Much Tax do I Have to Pay?
    Hi, I am in full time employment. Last October I did some consulting and earned £500. Do I need to declare this by January 31st.
    20 January 2018
  • MoneyExpertise
    Re: A Guide to Unemployment Benefits
    Lara - Your Question:I am leaving my job as I am having to move out of London as I can’t afford to live here anymore. Will I…
    18 January 2018
  • Lara
    Re: A Guide to Unemployment Benefits
    I am leaving my job as I am having to move out of London as I can’t afford to live here anymore. Will I be able to claim…
    17 January 2018
  • MoneyExpertise
    Re: A Guide to Unemployment Benefits
    Bob - Your Question:I have been out of work for a while and my contribution based pay has now stopped am I entitled any more…
    15 January 2018
  • Bob
    Re: A Guide to Unemployment Benefits
    I have been out of work for a while and my contribution based pay has now stopped am I entitled any more benefits? I am…
    14 January 2018
  • MoneyExpertise
    Re: How Much Tax do I Have to Pay?
    Tess - Your Question:Do I have to pay tax if I only started self employed beginning October 2017Our Re
    12 January 2018
Further Reading...
Our Most Popular...
Add to my Yahoo!
Add to Google
Stumble this
Add to Twitter
Add To Facebook
RSS feed
You should seek independent professional advice before acting upon any information on the MoneyExpertise website. Please read our Disclaimer.