Introduction
When faced with unmanageable debt, bankruptcy may seem like the only option. However, it’s important to understand the different types of bankruptcies available in the UK before making any decisions. In this blog post, we will delve into the three primary types of bankruptcies and help you better understand their implications, eligibility criteria, and processes. By the end of this article, you’ll have a solid understanding of the bankruptcy landscape and be equipped to make informed decisions about your financial future.
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement (IVA) is a formal, legally-binding agreement between a debtor and their creditors to pay back a portion of their debts over a set period, usually five to six years. It’s designed for individuals who have a regular income and can commit to making monthly payments but are unable to meet their full debt obligations.
Pros:
- Allows you to keep some of your assets, like your home or vehicle
- Provides protection from further legal action by creditors
- Debts are written off at the end of the IVA if you meet all agreed-upon payment terms
Cons:
- Can be expensive, with fees and costs typically ranging from £1,500 to £5,000
- Affects your credit rating for six years from the date the IVA is approved
- Requires a high level of commitment, as failure to comply with the terms can lead to bankruptcy
Eligibility Criteria:
- Owe at least £10,000 in unsecured debt
- Have at least two different creditors
- Able to make regular payments towards the debt
Debt Relief Order (DRO)
A Debt Relief Order (DRO) is a form of insolvency that can provide relief to those with lower levels of debt and little to no assets or disposable income. It’s a suitable option for people who cannot afford to repay their debts in a reasonable timeframe.
Pros:
- A more affordable alternative to bankruptcy, with a one-time fee of £90
- Provides protection from creditors
- Debts are written off after 12 months, provided you adhere to the DRO’s restrictions
Cons:
- Only covers unsecured debts up to £30,000
- Affects your credit rating for six years from the date the DRO is approved
- Restrictions on borrowing and acquiring new debt during the 12-month period
Eligibility Criteria:
- Owe less than £30,000 in unsecured debt
- Have less than £75 per month in disposable income
- Have assets worth less than £2,000
Bankruptcy
Bankruptcy is a legal process where an individual’s assets are used to repay their debts, and any remaining debts are written off. It’s typically considered a last resort when other debt solutions are not suitable or have failed.
Pros:
- Debts are usually written off within 12 months
- Provides protection from creditors and legal action
- Can help regain control of your financial situation
Cons:
- Expensive, with application fees and other costs
- Affects your credit rating for six years from the date of bankruptcy
- Can lead to the loss of valuable assets, such as your home or vehicle
Eligibility Criteria:
- Unable to repay your debts in a reasonable timeframe
- Other debt solutions have been explored and deemed unsuitable
Conclusion
Bankruptcy should never be taken lightly, but understanding the various options available can help you make an informed decision about the best path forward. Remember to consult with a debt advisor or professional before deciding on a specific bankruptcy type, as they can provide tailored advice based on your unique financial situation.
