5 Alternatives to Going Bankrupt
- 30th November 2018
- Posted by: Loanable
- Category: Resources
No one wakes up one day and says to themselves, “today is the day I go bankrupt”; unless that is what they have been planning to do.
For the majority of people who are struggling with their bills and accounts and are in debt, the operative word here is struggle. They struggle for years in many instances; financially limping along month-to-month.
By making the decision to go bankrupt, which is a major financial decision, the person is throwing their hands up in the air, saying publicly they can no longer handle their personal finances, and are asking for help, help in the form of the courts and insolvency laws.
However, while we are looking at alternatives to bankruptcy, and bankruptcy is not for everyone, it is there for a reason, to help those in debt. And it does help those in debt, by relieving them of their obligations to repay the debts; the debts are discharged or no longer owed.
The court intercedes on behalf of the bankrupt, stopping all collection activity and contact from those they owe, which is a bit of breathing space for the debtor or person going bankrupt.
Many people who declare bankruptcy feel a sense of relief as they have been struggling with their debts for years. Many describe it as a weight being lifted off of them.
So again, while we are looking at alternatives to going bankrupt, for some bankruptcy may be the better or strongest option. And for some bankruptcy is not an option, and as we look more at bankruptcy, we will see why some people cannot go bankrupt, the cost is too high.
And what is the cost of going bankrupt?
A few things:
* Credit history and rating damaged
* Bankruptcy says on your credit file for six (6) years
* Possible loss of assets (property)
* Possibility of being required to pay into the bankruptcy for three (3) years
* Listed on the insolvency register
These are simply facts, and are not meant to be “scare tactics” to have someone not go bankrupt. As stated, for some people, bankruptcy is the better option, or only option.
Who Can Go Bankrupt and The Process
Before we discuss alternatives to going bankrupt, lets take a quick look at bankruptcy itself, the process, and who can and cannot go bankrupt.
A few facts about bankruptcy:
* If you owe someone £5,000 or more they can make you bankrupt
* Bankruptcy costs £680, and can be paid in instalments
* You can file for bankruptcy online
* Once declared bankrupt your creditors must cease contact with you
* You are in bankruptcy for 12 months and then the bankruptcy is discharged
* You may lose assets such as property
* If you are working and have any surplus income after your allowed expenses, you may be required to pay into the bankruptcy for a period of three (3) years
* Bankruptcy is for unsecured accounts
The process of going bankrupt is very simple, you file online and pay the fees.
An Official Receiver is appointed to review your forms and speak with you. This is to see if you have any assets that can be liquidated to pay your creditors, and also if you have any surplus income after your allowed expenditure to pay towards the bankruptcy.
Then after 12 months the bankruptcy is discharged and you no longer owe the accounts you included in the bankruptcy. Even if you forgot an account, it is automatically included in the bankruptcy.
Bankruptcy stays on your credit history for six (6) years, this does not mean you will not get credit during this period, however it may be difficult.
There is much more about bankruptcy and other questions people have which can be found here by reading our guide on bankruptcy.
The main reason many people wish to avoid bankruptcy is due to the fact they own property, and the property has equity in it, or it has value, and in bankruptcy they could very well be forced to sell the property.
This is a strong motivating factor to not go bankrupt.
The first thing we must mention in order to look at alternatives to going bankrupt, the person must have some means to repay their accounts. If someone is not working, earning a wage, and has no assets, then bankruptcy may be the better solution.
Also, as we will see, there are really only four (4) ways to not go bankrupt, and also not be listed on the insolvency register. The fifth alternative to going bankrupt, does help one avoid bankruptcy, but you are still technically insolvent, asking the courts and laws of the land for financial help, and are listed on the insolvency register.
We are referring to IVA’s/Individual Voluntary Arrangements.
Another point to make when looking at alternatives to going bankrupt is your credit rating and credit score.
Even alternatives to going bankrupt an affect your credit, and credit score. However, when a person is seeking ways to repay their accounts, or considering bankruptcy and alternatives, credit history and credit scores take a back seat, they are not the priority.
One other point to make is that with these alternatives, you may be able to do more than one, and what may work for one situation and person, may not work for another. It will depend on a few things:
* How much debt you have
* Your full financial picture, working, wages, ability to repay
* Assets you may or may not have
* Your creditors
* Your credit rating and score
So in no particular order, let’s review some ways to avoid bankruptcy.
Alternatives to Avoid Bankruptcy
One option to avoid bankruptcy is to consolidate the accounts/debts you currently have. This means taking out a loan to pay off the accounts you have, leaving you with one (1) monthly payment, which can be lower than the multiple monthly payments you were paying.
While this is a way to get your accounts and debts in order, there are a few caveats to this plan:
* You need to qualify for the new loan, which means a passable credit score, and be able to show affordability.
* You need to address and cure what brought you to this point of needing to consolidate your debts, lest it happens again.
* You need to be able to get a loan amount, and terms that make the consolidation practical.
As you can see, these are some strong hurdles to overcome.
With that being said, for some consolidating their debts makes their financial lives easier, and allows to them to repay the accounts and avoid any form of insolvency.
Work Directly With Your Creditors
By contacting each of your creditors directly and advising them of your circumstance, and that you are struggling with your payments, many have in-house programmes that will reduce or freeze the interest and fees, allowing you to repay the account.
While many creditors may be willing to help you, and have programmes in-house to work with you, not all have these programmes, and if you have many creditors, such as 3 or 4 credit cards, a personal loan, etc, it can be difficult to get all of your creditors on the same page.
Then there also is the issue of preferring one creditor over another.
If one creditor requests £50 a month and another £60 a month, you are preferring or paying more to one creditor over another. Some creditors take exception to this, and after all, they are looking out for their best interest.
This is where our next alternative to bankruptcy can help.
Debt Management Plans
Debt Management Plans or DMP’s, are plans administered by third parties, usually charities, to help someone with their accounts/debts.
They review your financial situation, and after a careful and complete income and expenditure form being completed, then know what you can afford each month to pay to all your creditors. They then contact your creditors via proposals offering what you can afford to pay each month.
While a DMP is an informal arrangement, most banks, lenders, and creditors have agreed to work with borrowers under these terms.
The accounts are frozen to any new charges and interest, and you simply make the payments each month until the balances are paid in full.
An example may be you owe £12,000 in total to 4 creditors, 3 credit cards, and one personal loan.
Creditor A: £3,000
Creditor B: £5,000
Creditor C: £1,000
Creditor D: £3,000
After a review of your finances and an income and expense form being completed, you show a surplus of income of £250 each month, which will be split amongst your creditors, based on the percentage of your total debt that you owe each of them.
Creditor A: 25% so a payment of £62.50 a month
Creditor B: 42% £105 a month as payments
Creditor C: .08% £20 a month as payment
Creditor D: 25% so £62.50 a month
Both in-house repayment programmes, and also DMP’s, do not involve your property or assets, so if you were to have a property of value, in bankruptcy you may lose it, however through these repayment plans, your property is not a part of the plan, and is not in consideration.
Creditors will periodically review your situation, in some instances every six (6) months, to see if anything has changed, and if you can afford to repay more.
Settling a debt or account is a way to avoid bankruptcy and become debt free, however, it requires that you have the money, cash to do so.
You are asking a creditor to accept less than the full balance on an account, and write-off the remaining balance; you are asking a lender to take a loss.
An example may be that you owe five creditors a total of £25,000.
Creditor A: £10,000
Creditor B: £1,000
Creditor C: £5,000
Creditor D: £4,000
Creditor E: £5,000
You may wish to try and settle these accounts for .60p or more or less, on the pound. At 60%, this would be £15,000, which is considerably less than the £25K, but once again there are some caveats in doing this.
The first is you need the money/cash to do so, and the second is trying to get 5 creditors on the same page and agree to a 60% or more or less settlement. Each creditor is going to want to maximise their returns.
If someone sells a property and has a lump sum of money to offer, a settlement can be a reality in avoiding bankruptcy, or if as a borrower you can pay off the agreed settlement amount in 2 or 3 payments, it also may be a possibility.
While a way to avoid bankruptcy, settlements can be difficult to arrange, unless you use a form of our last option to avoid bankruptcy, which is an IVA, in particular a full and final settlement IVA.
We mention IVA’s or Individual Voluntary Arrangements as a way to avoid bankruptcy, because they are a way to avoid going bankrupt, but they are still a form of insolvency, and as such, you are listed on the insolvency register. Which is not necessarily a bad thing.
IVA’s in helping someone avoid bankruptcy, can also allow them to keep their property, which again is a major reason why someone may wish to avoid bankruptcy.
Born out of the Insolvency Act of 1986, IVA’s are set-up by Insolvency Practitioners, and once again an I&E is completed, outlining what you can afford to realistically pay each month to your debts.
Proposals are sent by the IP to your creditors, and as long as the majority agree to the proposed reduced monthly payments, the IVA is binding to all your creditors.
You pay these reduced payments for five (5) years, and after that, any remaining balances on your accounts are written off, and you are debt free.
Sounds good, and easy, and in most instances it is. However, there can be some caveats.
If you own property with equity, you will be required to release a portion of that equity, either through a remortgage, or continued IVA payments for up to 12 months, to be paid into the IVA.
You are still however, preserving your property.
If you have more equity in your property than debts, you are technically not insolvent. Your assets exceed your liabilities, so an IVA is not an option. You can sell the property, and pay all your creditors in full.
A full and final settlement IVA is where you make settlement offers to your creditors, and once gain as long as the majority agree, it is binding to all.
This form of settling debts keeps everyone on the same page so to speak, where as trying to settle the accounts on your own, without a binding agreement such as the IVA, can prove difficult.
So while a form of insolvency, IVA’s are a way to avoid going bankrupt.
Debt Relief Orders
DRO’s or Debt Relief Orders are while a way to not go bankrupt, are in essence a mini-bankruptcy, or a bankruptcy-light.
DRO’s are for those with debts of £20,000 or less, no more than £50 surplus income, and no real assets totalling over £1,000.
You are under the same restrictions as being bankrupt, and it is reported similar on your credit history.
So DRO’s are basically like going bankrupt.
In reviewing alternatives and options to avoid bankruptcy a few things must be stated again:
* Your credit score and credit file will be impacted in most of these options. Only debt consolidation may not impact your credit.
* Credit scoring aside, the goal is to avoid bankruptcy and get out of debt.
* What alternative is best for you will depend on your full set of circumstances.
* Bankruptcy and DRO’s are there for a reason, and for some, are the better option.