Depending on your financial situation and unique circumstances, it might be more beneficial for you and your creditors to utilise a different debt solution to bankruptcy in order to address your monetary issues.
The following page will outline the alternative procedures you can take in order to tackle your debt, so you can decide whether going bankrupt represents the best option for you personally.
If you are someone who has had at least one of your lenders successfully acquire a county court judgement against your name, then the presiding court could decide to issue an administration order.
In order to be given this option, you will need to obtain an n92 form from the court and provide information about all of the debts you owe at present. If the court decides to accept your application for administration, you will be required to make monthly payments to them directly so they can re-allocate the money to your creditors. In order to be applicable to enter into administration, the collective value of your debts must not exceed £5,000, and you’ll be required to clearly display that you earn a steady enough and sufficient income to afford to make the payments on either a weekly or monthly basis. You also have at least one county court judgement against your name, as this is a pre-requisite for anyone endeavouring to utilise this option.
There are no fees you will be required to pay in order to obtain an administration order though you should keep in mind that the court will take a 10% cut from your payments in order to contribute toward the costs of the order. Failure to make your payments consistently and on-time will likely result in the termination of your arrangement and you might be subjected to similar inhibitions to an individual who is bankrupt.
Once you have been issued with an administration order, your creditors will be unable to apply interest and late charges to your outstanding debt total, and they will not be able to pursue you for money without first acquiring permission from the court. Your court should clearly outline the amount of money you will need to pay them each month as part of your order, and should identify whether you will need to successfully pay some or all of your debt. This is because in some cases, you might have your remaining debt written off when your order comes to an end if you were unable to repay it in full within a reasonable period. In cases such as these, you will be issued a Composition Order which will map out the day that your Administration Order will be discharged and your outstanding debt will be written off.
If your financial situation worsens whilst you have an administration order and you are rendered incapable of making your payments to the court, you are able to make a formal application requesting a change in the terms and conditions of the order. Your presiding county court will then decide whether to accept your request and will instruct you about what you’ll need to do next.
A reference of your Administration Order will be placed onto the Register of Judgements, Orders and Fines for 6 years, after which it will be cleared. When your order comes to an end, you will be given a Certificate of Satisfaction from your court which will need to pay £15 for. It is important to keep in mind how important this is because you’ll have to send copies to the main credit reference agencies so they are aware that your order has come to an end.
Ultimately, Administration Order’s can be a useful measure to address smaller levels of debt but are evidently unsuitable for anyone who owes more than £5,000 to their creditors or hasn’t had a county court judgement taken against them. If you are someone who does qualify for the order, then you should keep in mind that it can provide you with an opportunity to make your debt more manageable, making it well-suited to you if you have a sufficient level of income to uphold your monthly payments to the court. However, if you do not believe you can do this, or do not meet the requirements, then another debt solution is better suited to your circumstances.
If you are someone who believes their financial difficulties are short-term, then using bankruptcy might be the wrong option to pursue due to the devastating impact it can have on your credit rating and the potential loss of all your properties and assets that will most likely materialise should you use the measure.
As such, you may want to consider using a debt consolidation loan, which simply involves taking out one large loan to pay off all of your smaller liabilities. By doing this, you can ensure that you simplify your debt repayment by consolidating all of your individual debts into one larger loan. As you are given the decision about which loan deal you want to use for your consolidation purposes, you could find yourself paying a smaller amount each month on your loan repayments, though usually you’ll end up paying more than the amount of debt you had prior to consolidating it. As such, consolidating your debt is more beneficial in an organisational sense rather than as a debt solution, though it will stop late and interest charges building up if you are someone who has more than one creditor debt that you are defaulting on at present.
Unlike other debt solutions, debt consolidation will not adversely impact your credit rating unless you begin to miss the repayment dates on your new loan. This can be an attractive feature of the solution for anyone who envisages needing access to credit facilities in order to further their ambitions in the future. However, you should keep in mind that if you are already defaulting on some of your debts, then your credit rating will likely have been negatively affected and you might be offered debt consolidations loans with far higher interest rates than you would desire by providers.
If you are someone who currently has no form of steady income, is logistically unable to repay your debts at present and do not envisage being able to pay them back any time soon, then you may want to avoid using debt consolidation, because the likelihood is that it will worsen rather than improve your situation. This is because you will simply take on larger levels of debt, potentially at higher rates than you should, without any realistic chance of repaying it and will then relapse into the same difficulties that you were experiencing before. Similarly, if you are someone with poor money management skill, then you should avoid using debt consolidation because you will simply end up overspending with the money you obtain from the larger loan and pass back into financial trouble again.
However, if you are someone who earns a steady income and has only fallen into financial difficulty because of unexpected circumstances, then you may want to pursue this option because it will stop your current debts building up from late and interest fees and will provide you with ample time in order to get back on your feet and repay your debts in full.
Debt Management Plan
If you have some form of disposable income available to you each month after you have paid for all your living essentials such as your housing, utility, food and drink costs, but not a sufficient amount of money to pay your debts back, then the likelihood is that you are well suited to use a debt management plan. A debt management plan involves you undertaking a comprehensive evaluation of your finances and determining how much you spend each month on their living essentials, such as on the aforementioned bills. After this, you will need to subtract this value from your income each month, in order to determine how much disposable income you have each month to contribute toward your creditor debt.
You will then need to decide whether you wish to make a reduced monthly repayment offer to your creditors alone or with the help of a debt management firm. If you choose the latter, then you will need to arrange a meeting with your creditors so that you can propose the new repayment plan with them. The offer should involve amalgamating all of your separate loan repayments to different parties into a single, affordable monthly sum which reflects the level of disposable income you have each month. You should keep in mind that your creditors are under no obligation to accept, and even if they do, the new arrangement is not legally binding. If you use a third party to facilitate your debt management plan, then they will negotiate with your creditors on your behalf in order to try and get them to accept.
If your debt management plan is accepted by your creditors, then the amount you pay towards all included unsecured debts will be reduced to reflect your financial situation and will only need to be paid in the form of one lump sum each month. Both you and your creditors can then decide when you wish to leave the arrangement, though you both have the power to do so at any time. In most cases, late and interest charges will stop being applied to your debt once the debt management plan has been accepted, though this is not always the case.
If you are someone however who is currently finding it difficult to pay for your day-to-day living at present, then it is likely that you should consider another debt solution because you will not have enough money to make your reduced payments when on the plan and will solve nothing from using this option.
Debt Relief Order
Often regarded as a less radical version of Bankruptcy, a debt relief order could provide you with similar benefits if you are someone who has unsecured debts totalling less than £15,000. They are particularly well suited to people who are not homeowners and have a very low level of disposable income each month. A debt relief order usually runs for one year, during which time all of your creditors will be unable to take legal action against you to recover their money without first obtaining the consent of the court. After the 12 months of the order comes to an end, you will be freed from the debts included in your DRO, providing that your circumstances have not improved.
The debt relief order procedure consists of a collaborative initiative between your specialist debt advisors and the Insolvency Service. Your debt specialists you assist you with making your application, and will then process it and send it off to the Insolvency Service for them to evaluate. If it is accepted, then you’ll be required to pay a £90 administration fee in order to have the Order made official.
There are certain and specific criteria you must meet in order to qualify for a DRO, mainly that you cannot have unsecured debts higher than £15,000, be a homeowner, or have more than £50 disposable income each month.
The criteria you must meet to qualify for a debt relief order are:
- You cannot possess a vehicle that is valued over £1,000, and the combined value of your assets must total less than £300.
- You cannot be a homeowner.
- The amount of disposable income you have available each month must total less than £50.
- You cannot have filed for bankruptcy in the last 6 years and can only make a request for a Debt Relief Order every 6 years as well.
- You cannot owe more than £15,000 in unsecured debts.
- You have to be able to clearly display that you have no way of repaying your debt at present.
- You must have been a resident of England or Wales for the past 3 years.
- You cannot be utilising any other insolvency measure whilst making an application for a Debt Relief Order, such as an IVA.
- You must clearly identify all activity you have undertaken in the housing market during the last two years. If you’ve sold your property for a lower sum than its market value, you must make the insolvency service aware of this and it could negatively impact your application.
Individual Voluntary Arrangement
An Individual Voluntary arrangement is a legally binding agreement between yourself and your creditors to repay some or all of your unsecured debt over an extended period of time. IVA’s are suited towards people who believe they have no chance of repaying their debt anytime soon under current circumstances, but desire to keep ownership of their assets and home. You will have to obtain the services of a licensed insolvency practitioner, who will be tasked with facilatating and presiding over your IVA. You will have to work collectively with your IP in order to determine how much you can realistically contribute towards repaying all of your unsecured debts each month whilst also paying your living expenses in full. Your IP will then take this into consideration, and convene a meeting of all your unsecured creditors so they can make a reduced monthly repayment plan offer to them. If 75% of your creditors agree, then all will be legally bound to the arrangement, and you will be expected to make the monthly repayments on time for the next five years. Your credit rating will be adversely affected and you will find it extremely difficult to acquire new credit during this time. However, you will be able to keep your home and most of your assets, unlike with bankruptcy.
At the end of the IVA, providing you have adhered to the terms of the agreement you will have the remaining balance written off, irrespective of whether you made your repayment in full. Your insolvency practitioner may ask for you to release equity in your home through a remortgage in the last year of your IVA.
For more information about IVA’s, read our page: