Bankruptcy can be a daunting and life-changing decision, often associated with negative financial and emotional consequences. Fortunately, the UK offers a range of alternatives for those struggling with debt. In this blog post, we’ll explore some of these options and help you decide which one is most suitable for your situation.
Debt Management Plan (DMP)
A Debt Management Plan (DMP) is an informal agreement between you and your creditors, where you agree to pay off your debts over a longer period. This option is suitable if you can afford to make regular monthly payments but need some breathing space to manage your debts more effectively.
Pros:
- Flexible repayment terms
- No legal proceedings
- Less impact on your credit rating
Cons:
- Interest and charges may continue to accrue
- Takes longer to pay off debts
- Not legally binding, so creditors can still take action
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement (IVA) is a formal, legally-binding agreement between you and your creditors, overseen by a licensed insolvency practitioner. IVAs allow you to make affordable monthly payments for a fixed period (usually 5-6 years), after which any remaining debts are written off.
Pros:
- Legally binding, preventing further creditor action
- A portion of the debt is written off
- Less stigma compared to bankruptcy
Cons:
- Can affect your credit rating for six years
- Fees and costs associated with the insolvency practitioner
- Failure to meet the terms can result in bankruptcy
Debt Relief Order (DRO)
A Debt Relief Order (DRO) is a suitable option for those with low income and few assets. If you have less than £20,000 of unsecured debt and little to no disposable income, a DRO may be the right choice for you. This order is granted by the Insolvency Service and effectively freezes your debts for 12 months. If your financial situation doesn’t improve during that time, the debts will be written off
Pros:
- Debts are written off after 12 month
- Affordable option with a one-time fee of £90
- Creditors cannot take further action during the DRO period
Cons:
- Only available to those with limited income and assets
- Affects your credit rating for six years
- Some debts, like student loans and court fines, cannot be included
Administration Order
If you have at least one County Court Judgment (CCJ) against you and owe less than £5,000 in total, an Administration Order might be a viable option. The court will determine how much you can afford to repay each month, and you’ll make these payments to the court, which then distributes the money to your creditors. Once the order is complete, any remaining debt is written off.
Pros:
- Single monthly payment to the court
- Protection from further legal action by creditors
- Remaining debt is written off upon completion
Cons:
- Limited to debts under £5,000 with at least one CCJ
- Affects your credit rating for six years
- 10% administration fee taken from your monthly payment
Before deciding on bankruptcy, it’s crucial to explore these alternatives and consider how they might better suit your situation. Each option has its own advantages and disadvantages, so it’s essential to weigh them carefully. If you’re unsure about which path to take, it’s always best to seek professional advice from a qualified debt advisor. The Money Advice Helpline is here to help you navigate your financial difficulties and guide you towards the most suitable solution.
