3 Powerful Alternatives To Personal Bankruptcy

With Citizens Advice reporting that they are taking on 9,000 new free debt advice cases in Britain every day, it may not come as a shock that as a nation our personal debt now stands at just under £1.5trillion, but perhaps more startling is the fact that our personal debt now outstrips the total produced by the nation as a whole each year.

For many personal bankruptcy seems like the only option, a course of action that whilst it does mean your debt can be wiped clean in as little as a year, can for some lead to unemployment, the loss of a home, and in some cases long term inability to obtain credit. So, are there any other, preferably less punitive options?

Individual Voluntary Arrangements (IVAs): IVAs are a form of legally binding agreement between an individual and their creditors. The aim of an Individual Voluntary Arrangement is to agree a formal arrangement between an individual and their creditors, for the individual to make, and stick to, reduced monthly repayments, based on what they can afford, rather than the amount owed by them. In return all creditors will agree to cease all further legal action to recover the debt, as long as the terms of the arrangement are met by the debtor. Because an Individual Voluntary Arrangement is a legally binding agreement, and comes under the legislation of the Insolvency Act, it must be setup and managed by a licensed Insolvency Practitioner (IP). The IP must secure agreement from three quarters, in value, of the individuals creditors for the IVA to come into effect.

An Individual Voluntary Arrangement typically lasts for 5 years, and as long as the debtor maintains their payments, when the IVA is concluded they will be free from any outstanding debt. Non payment may lead to further legal action, and probably result in bankruptcy for the individual.

The payment structure agreed under the IVA will be based on what an individual can afford to repay, and so can reduce the level of indebtedness considerably, but for many the key advantage of an Individual Voluntary Arrangement is that unlike bankruptcy it is not made public and so employers do not need to be informed, however the IVA will show on the individuals credit record for up to six years after it is completed and so will likely have a significant impact on their ability to obtain credit even after the arrangement has been satisfied. The key qualifying criteria to be able to even consider an IVA will be that the individual has at least fifteen thousand pounds of qualifying debt. As a legally binding agreement it is advisable to gather as much IVA information as possible and seek professional advice as early as you can, to asses if this is a suitable option for your circumstances.

Debt Relief Orders (DROs): DROs were introduced on 6th April 2009 as an alternative to an IVA or bankruptcy, for non homeowners, with little or nothing in the way of assets, and relatively low income and debt. A Debt Relief Order gives similar legal protection to an IVA and prevents enforcement by creditors, but usually lasts only 12 months and does not involve any repayment of debt.

Debt Management Plans (DMPs): Debt Management Plans are an informal form of agreement, and so do not follow any prescribed form. In general they are an agreement for an individual to pay a reduced amount to each creditor, and in this respect are similar to an IVA, however not being a legally binding agreement there is no guarantee that interest and charges will be frozen by creditors. DMPs can be setup by the individual themselves but are often setup via debt management company or debt charity.

Whilst as an informal arrangement a DMP offers no legal protection for the debtor, the fact that they are at least attempting to repay the debt will often mean that debtors do not pursue legal enforcement action.

A debt management company will normally retain all or some of the first few payments as a setup charge for the DMP, as well as an ongoing charge each month. Though many people find this an acceptable consequence of not having to deal with their creditors themselves.

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