Alternatives to Bankruptcy
As a one parent family you may well have seen adverts promising a quick way out of debt. But take care! The reality may be very different.
This guide briefly mentions the various solutions that you should consider when dealing with debt.
Bankruptcy is a quick and assured way of dealing with debts that you cannot repay. Bankruptcy usually lasts for one year, however the consequences may be longer lasting.
When you go bankrupt, assets of any value are at risk, you will be subject to bankruptcy restrictions and an investigation into your affairs will be carried out.
For more information on bankruptcy see our Guide to Bankruptcy.
Individual Voluntary Arrangements (IVA)
An IVA is an agreement between you and your creditors to make repayments towards your debts and have the remainder written off. You will usually make monthly payments over a period of 5 years, pay a lump sum or do both.
Although some of the debt is usually written off, you should understand that the creditors will want you to agree to repay as much as you can over the period of the IVA. You may also have to release any equity in your property, ie if you own a house, you may have to re-mortgage or lose your home.
Debt Management Plans
Debt Management Plans are an agreement between you and your creditors to repay your debts at a more affordable rate. A debt management company will put forward a plan to your creditors.
You will then make a monthly repayment to the debt management company who should then pay your creditors. Many debt management companies charge a fee for this service. Some do not. You will usually have to repay all of your debt and the creditors are not obliged to take part. Ultimately you may end up repaying more than you originally owed due to the charges involved and the extended repayment period.
Loan consolidation simply involves repaying your existing debts by taking out one bigger loan. The desired effect is to reduce the monthly repayments or overall interest that you pay.
The hidden danger: If you use a secured loan then this could exclude you from using other solutions available to deal with your debts as well as put your house at increased risk if you are unable to keep up with the payments.
Debt relief orders
A debt relief order is similar to bankruptcy: After a period of one year usually all your debts will be cleared. An authorised intermediary is required to make the debt relief order application and there is no need to petition at court like in bankruptcy.
A debt relief order is available to individuals owing less than £15,000, gross assets less than £300 and a disposable income less than £50 per month. If you own a house then you cannot apply. The consequences are similar to bankruptcy.
County Court Administration order
You can ask a court to make an administration order if you owe no more than £5,000 to at least 2 creditors and you have a county court judgement against you that you cannot pay.
A county court administration order will enable you to make repayments to your creditors, through the court, at an amount specified by the court. Interest and charges will be frozen and the court will contact your creditors and make the payments for you. If a composition order is made then you may only have to make payments for a specified period of time.