What are the best options apart from bankruptcy?

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Though sometimes it’s clearly the only course of action to take when debt has completely spiralled out of control, bankruptcy may not always be necessary. There are a number of organisations that specialise in offering free advice on the various alternatives, and we highly recommend consulting an insolvency expert to discuss your individual circumstances. However, as an overview you may want to consider:

A Debt Relief Order or DRO

This option is only open to people with debts totalling £15,000 or less. You must have under £50 left at the end of each month once living costs have been taken into account, and have no property or assets worth over £300, although vehicles are permitted to the value of £1,000.

The implications of a DRO are similar to those of bankruptcy, and an application to an official receiver is required. This costs £90, and is non-refundable, meaning even if you are unsuccessful this will still have to be paid in full. A Debt Relief Order lasts for 12 months, during which time interest on any outstanding accounts will be frozen and creditors cannot chase for payment.

At the end of your DRO all outstanding debts will be written off, but there will be financial restrictions that result from the procedure. Credit ratings are severely affected in any instance, and your ability to obtain loans and such like will be reduced in the future.

An Individual Voluntary Arrangement or IVA

An IVA is another legally binding process, meaning that although it has less damaging repercussions than a DRO entering into such an arrangement must be taken very seriously. The process is designed to help clear unsecured debts only, which include overdraft facilities, credit cards, and utility bills. An insolvency practitioner will be assigned to your case, and will oversee the process, ensuring you develop a workable payback plan.

This will be income assessed, but it’s vital to consider that your creditors do not have to agree to this. Only when 75% of all the organisations you owe money to approve the IVA can it be brought into action. An average arrangement can last for around five years before the outstanding debts are written off, providing you comply in full. Failure to do so will result in further action being brought against you, and it’s also worth noting there is a fee involved, and this does impact on credit ratings.

A Debt Management Plan or DMP

The lesser of the three main alternatives to bankruptcy, by contacting a debt management company or charity you can set up a DMP. This will consolidate all debts into one, easily maintained monthly payment, and is only available to people that have some month end cash but could not be considered financially stable.

A Debt Management Plan will affect your credit rating, but far less than the options referenced above. Like an IVA, this must be agreed by creditors before being actioned, and whilst interest is frozen you will be expected to pay back all the money you owe with reduced contributions to allow for breathing space.