The consequences of being made bankrupt are potentially very serious. You and your family may lose your home. You may lose your business. You may have to stop being a director of a company. You will be subject to restrictions as to what you can do during bankruptcy and your credit rating may be badly affected in the future. We look at the alternatives.
Alternatives to bankruptcy
The main alternatives to bankruptcy are:
- An informal arrangement with your creditor or creditors
- An Individual Voluntary Arrangement
- A Debt Relief Order
An informal arrangement
If you have only one creditor who is threatening to take legal action against you, they may be willing to accept instalment payments, particularly if you can offer security over a property or other valuable assets. If you have a number of creditors who are chasing payment, it may be possible to get them all to agree to a repayment arrangement, although it is unlikely to be possible to share any security available. Moreover, the problem with any informal arrangement with creditors is that there is no legal restraint on the creditors and any one of them could break ranks at any time and commence legal action.
A debt relief order
This process, which came into effect in 2009 has had the effect of removing low income and those of low asset value (i.e. those that cannot pay and have no reasonable prospect of being able to pay their debts) from the full bankruptcy process. A DRO is available to debtors who:
- Owe less than £20,000
- Have less than £50 per month surplus income (taking into account reasonable domestic needs)
- Have less than £1,000 worth of assets (motor vehicles are excluded provided that the car is worth less than £1,000 or is needed for disability purposes)
- Have not applied for a DRO in the last 6 years
It is not available for the following debts:
- Secured debts
- Court fines
- Family maintenance payments
- Student loans
- Debts created after the DRO has been issued
The application is made to the Official Receiver’s Office by a competent authority which includes the Citizen’s Advice Bureau, Consumer Credit Counselling Service, National Debtline and Payplan. Once the DRO is in effect, no legal action can be taken by a creditor and at the end of one year, the debtor is released from all qualifying debts.
Taking legal advice
Our solicitors are happy to advise on negotiations with creditors and granting of security for the purpose of an informal arrangement. We can recommend an Insolvency Practitioner to assist you with an IVA. As mentioned, there are many debt counselling agencies available who can assist with a DRO and to give guidance about debt and financial problems generally. Details of a debt counselling service near you may be found on the internet. For more information proceed to Entering into an IVA