Alternatives to bankruptcy

Bankruptcy is the procedure in which an individual declares his inability to pay off the debts incurred by him. The process of declaring bankruptcy has many procedures and consequences involved in it and it is a must to be aware of the possible alternative legislative processes that can be availed as declaring bankruptcy can have negative implications.

Family Arrangement – This is the first step you can choose to towards solving your debt problem in an easy way. You can talk to your creditors about any possible compromise over the amount or terms of debt. This is an out of court agreement and hence does not consider any legal binding. This might pose a problem in future if your creditor decides on neglecting the terms of compromise and you might end up being required to pay the debt in full. There are many organizations that are ready to help in such informal arrangements but beware as some might charge you for their services.

Individual Voluntary Arrangement or IVA – As the name suggests this is a voluntary step taken by the concerned individuals, insolvent and creditor to propose the terms and mode of payment. This is a formalised version of the initially discussed informal arrangement and has more legal binding. This is a comparatively better option than declaring bankruptcy as it helps you put forth your opinion on the way the assets and debts are dealt with. In this process normally an insolvency practitioner is involved who is an authorised and licensed individual to look over formal insolvency procedures. He advices and take appointments to carry over the Individual Voluntary Arrangement or IVA. He may also charge you for his services involved in the IVA process.

Debt Relief Order or DRO– In cases where an individual do not possess a house, have very less assets and also an income less than £50 per month, then applying for DRO would be another available choice for insolvency. This is an open option only for individuals with debts less than £15000. This is again an order which does not involve the court but is made by Insolvency services along with debt advisors. The order is also another means of safeguarding the insolvent’s company assets from creditors who cannot try to recover the money during the period of DRO. The DRO is normally made for a period of 12 months after which if you are still under the inability to pay your debts, the debts in your order will be written off. Though the DRO is a better choice than bankruptcy or insolvency, it imposes restriction on the debtor as demanding him to inform in case of application of credit £500 or more.

Administration Order – This is a payment to the creditors bought in by court order in cases of debt amount less than £5000. One or more of your creditors can apply and obtain a judgement in court against you, with the court making the administrative order. Once the order has been passed, you would have to pay monthly regular payments towards the debt owed to your creditors in the court. The court does not levy any charges but a small amount of the money paid to the creditors normally goes to the court. This procedure requires that the consolidated amount of money for which the order is passed needs to be less than £5000 and also that the debtor should have a constant source of information to meet the monthly payments. Any default in the payment amount for these orders will lead to bankruptcy leading to similar restrictions. In cases when the debtor is unable to meet the payment as ordered by court, a change of order can be requested in the court.

Debt Consolidation – Debt consolidation is the process of procuring a big loan to close or pay off all other small unsecured loan. It provides an advantage of paying a single payment at comparatively lesser interest rates than the option of multiple payments at high rates. There are various debt consolidation companies that can help in buying all your debts at a discount with collateral. This not only buys you a secured loan against all unsecured loans but also gets you a loan with low interest rates and less monthly repayments. But this alternate method can prove risky in case of payment default as you have taken the loan against your asset.

Debt Restructuring – This is another method that acts as an alternate to declaring bankruptcy by negotiating debt terms and payment amount with creditors so as to increase liquidity and rejuvenate the business operations. The reduction of debt increases cash flow and also tends to handle financial distress. The debt restructuring is an out-of court method and is normally inexpensive except for the time spent on negotiations with bankers and creditors. Most of the times, the creditors might accept for a decrease in debt amount, payment term extension or both.

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