How to Avoid Bankruptcy. Alternatives to Bankruptcy.
- See also:
- bankruptcy overview
- comparison matrix
- authorised debt settlement
- debt management
- IVA
- debt counselling
- enquire online
Many people who contact Clear Start have considered bankruptcy or have had concerns about being made bankrupt. It is essential that these people understand clearly what the implications of bankruptcy are and what other options are available to them, such as an IVA. It is also important to understand the perspective of the lenders - often bankruptcy is not what they want either.
There are some elements of bankruptcy which may appear attractive to someone who is unable to pay off their debts. For example, it can bring a close to the situation, and monthly contributions to the bankruptcy (following the Enterprise Act 2002) can be for as little as three years, and in certain circumstances only twelve months.
However there are still many reasons why people choose to avoid bankruptcy if they can. The most commonly stated elements of bankruptcy that are undesirable are:
- Loss of Assets
- Any property such as a house or flat normally must be sold.
- This is also the case with other significant assets, such as a car.
- Lack of Control
- One a bankruptcy is initiated, the outcome is out of the hands of the individual or household involved.
- Information is collected by the Official Receiver and the outcome is decided by the presiding magistrate on the day of the bankruptcy hearing.
- Credit Status is Ruined after Bankruptcy
- Impossible or very difficult to get a mortgage.
- Or any other credit such as a card or a loan.
- Embarrassment Over Social Stigma
- The bankruptcy is advertised in the newspapers.
- If the insolvent is a tenant, the landlord is informed.
- Loss of Career
- Certain employers will not accept someone who is or has been bankrupt
- There are careers where being bankrupt is unacceptable
- There are restrictions on owning a business or being a director
Following the Insolvency Act 1986, and alternative to bankruptcy was introduced, namely the Individual Voluntary Arrangement (or IVA). Clear Start has a division that specialises in setting up IVAs. An IVA is essentially an arrangement where the individual (debtor) voluntarily proposes a settlement with their creditors without going to court.
If the creditors accept the proposal then the debtor pays whatever they can afford to into a fund over a five year period, and then the proceeds of the fund are divided up between the creditors (minus the costs of set up and supervision). Meanwhile all interest charges are stopped, and the creditors are restricted by law from pursuing further legal action.
In comparison to bankruptcy the most commonly stated advantages of an IVA are:
- Possibility to Retain Assets
- It is usually acceptable in an IVA to propose to keep a house or flat.
- Equally, for example, an inexpensive car can be kept if it is essential.
- The Terms of the Proposal are Controlled
- Since it is the debtor who proposes the IVA this makes sure that he or she is happy with the terms.
- So there is no unexpected sale of assets, and the affordability of the monthly payments is agreed in advance.
- Better Credit Status
- An IVA is recorded against the credit history of an individual.
- But lenders tend to see it as a less severe negative than a bankruptcy.
- A More Private Solution
- No requirement to advertise in newspapers or inform landlords.
- Better Implications for Careers
- There is no legislation preventing individuals with IVAs from running companies are being directors.
- Many employers do not require information about current or previous IVAs.
Finally, it is not often in the best interests of a lender to make someone bankrupt, or to accept a bankruptcy from a debtor. It tends to be the case that a lender will get less back under bankruptcy than they would under an IVA. This can be for a number of reasons:
- Court costs and professional fees of a bankruptcy are higher than an IVA.
- The forced sale of a property or asset does not achieve its highest selling price.
- There are lease contributions to the fund. i.e. Three years as opposed to five years.
So, while there is an increasing number of people in the UK who are applying for, or being made bankrupt, there is an even greater increase in the number of people who are being approved for IVAs each month.
To understand more about bankruptcy or other alternatives such as an IVA call 0800 138 5445, or complete the enquiry form.
To contact an advisor call 0800 138 5445. Alternatively complete an online enquiry form and an advisor will call you back at the time that you specify.