When’s the right time to consider bankruptcy?

by James on March 2, 2017 · 0 comments

no-money-2070384_640Bankruptcy is an insolvency solution, created to deal with any outstanding problem debt you are unable to make repayments on; however, it does have a serious impact on your credit score and reputability from a financial perspective. The number of insolvencies has increased in the past year by a fifth: 24,251 people have taken personal insolvencies between July and September 2016, with many attributing this to the rising cost of living. Bear in mind that insolvency figures include bankruptcies, DROs and IVAs and it is the number of IVAs which has increased.

If you declare yourself bankrupt, it will be announced publically, in the local newspaper and the London financial paper – the London Gazette. You will also be listed online, so future creditors can search for you and it may hinder your ability to find work if your line of employment deals with finances.

Bear in mind you will also be required to pay a £680 fee to declare yourself bankrupt, and if you are assessed (and your wages are deemed high enough) your debts will not be written off immediately. Instead, you’ll have to make repayments for three years. (Your debts will be written off but you might have to pay into the estate for up to 36 months depending on your circumstances. You will be discharged in the year).

However, bankruptcy does relieve you of the worry of dealing with creditors and of the debt itself. Plus, you are allowed to keep household goods – unless these are of exception value – as well as a reasonable amount of money to live.

What debt solution you choose depends on your personal circumstances, therefore before settling on bankruptcy it is a good idea to look into other solutions as well to determine which is best for you. Here is a quick breakdown of the other effective debt solutions available, for your consideration:

Debt Management Plan (DMP)  

If you are struggling to make your monthly payments you could consider a DMP. A DMP allows you to pay a reduced monthly amount based on what you can afford to your creditors. A DMP can be arranged with your creditors directly or you can seek the services of a debt management company who will negotiate with those you owe money to. It’s also important that you remember to check there are no admin fees or extra charges when taking on this solution.

However, it is important to note that this is an informal arrangement, therefore creditors are still able to chase for payments, as well as being able to increase charges and take legal action against you.

Individual Voluntary Arrangement (IVA)

An IVA is an insolvency solution for those who can afford to make monthly payments to their creditors. You make monthly repayment to your creditors to pay off most of your debt and after the agreed period of time, usually five or six years, the rest of your debt is written off. If you can afford to make repayments to your creditors but you have a high debt level or the interest rates mean it will take you a long time to repay your debt, an IVA might be the right solution for you.

An IVA is a legally binding agreement between you and your creditors, with an insolvency practitioner acting on your behalf to negotiate the terms of your arrangement with those you owe money to. To qualify for an IVA, you must have debts of £7,000 or more and the ability to pay at least £50 a month. This debt solution covers both unsecured debt – such as credit cards – and secured debt, including rental arrears, late mortgage repayments and council tax arrears.

An IVA is similar to bankruptcy because you can have some of your debt written off at the end of the agreement; however it doesn’t necessarily require you to sell your home to release equity like bankruptcy does. An IVA protects your home.

It is a debt solution to consider when you are confident that your current financial circumstances are unlikely to change and you do not have any spare income or a large amount of money saved that you can pay to your creditors.

DRO (Debt Relief Order)  

A DRO is an effective way of dealing with your debts and has a low qualifying criteria; to obtain a DRO you must be unable to pay your debts and have £50 or less available after everyday expenses have left your bank account. You cannot own a house even in negative equity and your car must be worth no more than £1,000. It is an ideal debt solution for those with limited means/income who perhaps can’t afford to make monthly repayments to their creditors, or to go bankrupt.

A DRO lasts for a year and the application fee of £90 to pay is much smaller than that required for bankruptcy. Your creditors are legally unable to enforce the repayment of your debts once a DRO is in place, and providing your financial situation hasn’t changed after 12 months, your debts will be written off. Debts such as credit cards, overdrafts, benefits overpayments, rent and utility bill arrears and car finance deals can be included in a DRO.

There are various debt solutions available to help people in debt so if you are struggling to make ends meet it is recommended you seek debt advice. Debt solutions have different criteria’s and whether they’re right for you will depend on your individual circumstances. Anyone can apply for bankruptcy, providing they can afford the fee, but other solutions might be more suitable to your situation.

For now, your next step should be to seek out the advice of an expert debt advisor. There are many out there offering free impartial advice – they will help you determine what you qualify for and what solution is best.

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