Debt is a common problem that can quickly spiral out of control. If you’re in a level debt that you cannot manage, you have several options for paying it off or otherwise settling it. One or more of these options may apply in any given situation, it’s just a question of figuring out which one will work best, and which options your creditors are willing to work with.
There are several factors that determine which options apply to your situation. These include the amount and type of debt you have, the type and value of any assets you own, and what agreements your creditors are willing to enter into. For instance, in order to enter into a debt management plan or individual voluntary arrangement, some or all of your creditors must agree to it, even if it means they won’t recover all the money you owe them.
While bankruptcy is a method of debt management, it is generally the last resort, and is a less common way of dealing with debt than the alternatives. One reason for this is that bankruptcy restricts your ability to own or run a business, and may result in your home or other valuable assets being sold in order to pay the debts.
If you’re in debt that you’re unable to pay, one or more of the following methods may apply to your situation.
Debt management plan
A debt management plan is an arrangement you make with your creditors where they agree to accept a lesser monthly payment either temporarily or long term, until your debt is paid off. You can arrange a debt management plan simply by talking to your creditors and entering into an agreement with them, or buy using a solicitor or debt management company as a go-between.
Individual voluntary arrangement (IVA)
Under the terms of an IVA, you agree to pay as much of your debt as possible over a period of up to 5 years. To do this you work with an insolvency expert who will help you calculate how much you can afford to pay and over what period of time. Together with the insolvency expert, you’ll create a proposal that outlines your plan to repay your creditors over time. Usually the amount of time is between three and five years. The proposal is submitted to the court and to your creditors. To enter into an IVA, at least 75% of your creditors must agree to the proposal. Any creditors that don’t agree must abide by the terms if your proposal is accepted.
This is an alternative to bankruptcy, however if at any time you are unable to make your payments, the agreement may be cancelled and you may be declared bankrupt.
Administration order
If you are ordered to pay your creditors via a High Court or County Court judgement, but can’t pay in full, an administration order collects a monthly payment from you—as much as you can afford to pay—and distributes the money to your creditors.
Debt relief order (DRO)
If your debt is less than £20,000 and you have little in the way of assets and discretionary income, you can apply to the Bankruptcy Court for a debt relief order. This order restricts the ability of creditors to recover money from you, and writes off your debts after a certain period of time.
To apply for a debt relief order, you must go through a DRO adviser, a specialist who is trained to give advice and assistance on applying for a DRO.
Bankruptcy
If you can’t pay your debts, and none of the above options apply to your situation, bankruptcy may be your only option. If you are declared bankrupt, your eligible assets are shared between your creditors, and after a period of time with certain financial restrictions, you are discharged from bankruptcy.
To apply for bankruptcy, you can fill in an application online, pay a fee, and then wait for the decision of the adjudicator overseeing your case. Once the adjudicator decides to grant a bankruptcy order, the official receiver associated with your bankruptcy gains control of your assets, and uses them to repay your creditors. As long as you cooperate as the process requires, and abide by the terms of bankruptcy, you should be discharged after 12 months.
Note that this process is different if a creditor applies to have you made bankrupt, rather than you initiating the process yourself. A creditor can apply to make you bankrupt if you owe them more than £5,000, and if they have sent you a statutory demand regarding your debt or have tried to enforce a court judgement instructing you to pay the debt. If a creditor applies to have you made bankrupt you may be required to attend a bankruptcy hearing before a judge, who can make a bankruptcy order if the debt is still unpaid and you have not attempted to pay it.