3 Ways to Avoid Bankruptcy

Oct 12

3 Ways to Avoid Bankruptcy

If you’re struggling to meet your monthly financial commitments, then what options do you have? Bankruptcy is a final resort, but there are alternatives to help you pay off your debts. Debt management plans, debt consolidation loans and IVAs can all help you avoid bankruptcy, but which is right for your situation?

Debt Management Plans

One solution is a debt management plan, which looks at your income and expenditure, including priority debts and living expenses. Any money that is left at the end of the month is divided amongst your creditors. The providers of the plan will contact your creditors and propose an affordable monthly payment, but they do not have to agree. In many cases creditors will stop further interest or charges and will not take legal action against you.

As you will still be paying the full debt it could take you longer to pay off. However, it shows your creditors that you are willing to make payments during periods of reduced income, for example redundancy or maternity leave. As this is not a legally binding agreement, if your circumstances improve you can increase your payments.

Debt Consolidation Loans

A debt consolidation loan means you can pay off all your current debts and then just deal with one monthly payment. In many cases the interest rate will be lower, reducing your payment. However, it may increase the term of the loan and the final amount you end up paying. Unlike a debt management plan, this loan won’t affect your credit rating if you keep up with the new payments. However, a large amount would require security, such as a property, which could end up being risky.

In many cases it’s not wise to clear some debts by taking out a further loan. If you’ve already missed payments then your credit rating may not be good enough to take out an additional loan. This solution probably best suits you if you’re currently struggling to meet your commitments, but you’re generally in good financial health and have a stable source of income.

IVAs

With an IVA (Individual Voluntary Agreement) you pay an affordable monthly amount to creditors over a fixed term, usually five years. Any debt that isn’t cleared after this time is written off. An IVA can be used if you have personal unsecured debts of over 10,000 to at least two creditors and have an income. The proposal will need to be agreed by 75% of your creditors, but once it is it stops them contacting you or taking legal action. If you need help with an IVA there are many organisations that can provide advice and set up an agreement.

As you are not making your contractual payments, an IVA will affect your credit rating for at least six years. If you own a property, then your creditors can force you to take equity out to help pay off some of the remaining debt. However, it is a beneficial alternative to bankruptcy, particularly for employees in industries where this is prohibited, including the police force and civil service.

Any alternatives to bankruptcy need to be fully researched before committing to anything. Depending on your financial situation and employment status, some options may not be suitable and you should seek independent financial advice.

This guest submission was contributed by Lloyd on behalf of IVA Expert. 

Image courtesy of stock.xchng.