3 Powerful Alternatives To Personal Bankruptcy

Britain is drowning in personal debt. Figures from Credit Action, the national money education charity, suggest that as of July 2010 the UK's total personal debt stood at almost £1.5trillion, or to put it another way, individuals now owe more than the country as a whole produces in a year. Not only that but it would appear we're finding it increasingly difficult to deal with our debt, according to Citizen's Advice they're handling 9,000 new free debt advice cases every day.

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): Individual Voluntary Arrangements are a form of legally binding agreement between an individual and their creditors. The aim of an IVA 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.

The vast majority of IVAs will last for a period of sixty months. At the end of the IVA all outstanding amounts will be written off by the creditors leaving you debt free. However failure to meet your agreed monthly payments will almost definitely lead to you being made bankrupt.

The aim of an IVA is for the individual to repay what they can now afford, rather than what they were contractually obliged to pay under the original loan, credit card, and finance agreements they had. They are also not made public as bankruptcies are, and so afford some privacy, and do not require employers to be informed or place restrictions on company directors, or professional qualifications. However an IVA is only an option if you have at least £15,000 in unsecured debts, and after completion of the IVA it will show on your credit file for up to 6 years so you will probably struggle to obtain credit for up to 11 years from the date of taking the IVA out. 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 came into effect in 2009 as an alternative to IVA or bankruptcy for non homeowners with less than £300 in assets and a disposable income of less than £50 per month, and were designed to tackle relatively small amounts of debt that were non the less causing significant pressure because of low income levels and no assets.

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. Debt Management Plans 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.

Most debt management companies will often make significant charges to setup a DMP, often retaining the first one, two, or more monthly payments you make under the plan, as well as an ongoing management charge which is often a percentage of the monthly payment you make.

About the Author

Just Clear My Debts is dedicated to helping UK individuals find powerful sources of free debt advice on a range of subjects from credit card debt to specific debt solutions such as debt managment plans and IVA information.

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