How to avoid bankruptcy

Bankruptcy is a last resort for many people in debt. It effectively wipes what you owe in just 12 months – but has a huge lasting impact on your credit rating and living situation. You may be at risk of losing your home if you own it and any other assets you may have. It can also affect your employment too. This is why it’s a good idea to look into how you can reduce the likelihood of needing to take it on.

We understand you don’t want to apply for bankruptcy or be made bankrupt by creditors – so we’ve broken down some alternative solutions that look into how to avoid bankruptcy altogether.

Sell what assets you have

If you have anything you can sell to put towards your debts to clear a large amount, this is always a good idea. A high-value vehicle, for example, is a good selling option as you can use the funds to offer a large amount to pay off a portion of your debt.

If you can live without other expensive items – such as valuable jewellery, furniture and electronics – then sell these too. It may seem drastic but if it helps to avoid bankruptcy and help you get back on track with your debt repayments, it may be a good solution.

However, always ensure you do not negatively impact your current way of living. If your car is essential as part of your daily life, it may be best to simply sell it and purchase a much cheaper one to use while you tackle your debts.

Carefully consider your spending

If your debts are leading to you consider bankruptcy, it is unlikely cutting back on spending will relieve you of them. However, carefully considering what is coming in and going out of your bank account is an important first step to tackling the issue. You may be able to find a direct debit subscription or membership you can remove to free-up money to put towards monthly repayments.

Ask friends and family for help

You should never take on more credit to repay debts, but asking for help from family and friends can be a good way of clearing a large portion of debts. You can ask to set up an arrangement to pay them back steadily over time.

Let your creditor know about your situation

If your creditor doesn’t know you are struggling to make repayments and you are behind on them, they may assume you just don’t want to pay. Instead, if they are aware of your situation you may be able to negotiate breathing space, which gives you 30 days to find a solution to tackle your debts.

This guide can help when it comes to making the first steps to work with creditors and ask for breathing space.

Don’t ignore demands sent by creditors

Creditors chasing for payment may send you a statutory demand, which means you are given a timescale to repay your debts. You usually have 18 to 21 days to reply to this, and within this time it’s important you talk to your creditors to find a way to come to some agreement to avoid bankruptcy.

They may agree for you to make repayments in instalments via a DMP (debt management plan) – an informal arrangement which allows you to make repayments in manageable monthly amounts. This is a good starting point when it comes to tackling debts, but there are also other debt solutions available to consider.

Find an alternative debt solution to bankruptcy

Bankruptcy isn’t the only insolvency solution that can help you. There are also other debt solutions such as individual voluntary arrangements (IVAs) and debt relief orders (DROs). These offer the same sort of debt relief as bankruptcy, but have different eligibility requirements and may be better for your current situation.

IVA (individual voluntary arrangement)

This insolvency solution sets up a manageable monthly repayment to your creditors based on your income and outgoings, over a period of usually five years. At the end of the five years the debt management company you use to set up your IVA – PayPlan is an example of one of these – may ask that you remortgage your home to release any equity it may have with the intention of paying this to your creditors.

However, many people find themselves unable to remortgage due to their poor credit rating and so the term of the IVA is extended to six years. It is a longer process than bankruptcy but you get to keep your home and make manageable repayments to clear your debts.

You can read more about the pros and cons of IVAs in our dedicated section on the site.

DRO (debt relief order)

A DRO is there for those who do not own property or have few assets to offer creditors. Therefore, it is the option non-homeowners may choose instead of bankruptcy. However, a DRO does have a different set of eligibility requirements, so it’s worth checking these first.

To be considered eligible for a DRO you must:

•    Owe less than £20,000
•    Have less than £1,000 worth of assets
•    Have worked or lived in England or Wales within the last three years
•    Have less than £50 a month disposable income

A DRO essentially works in the same way bankruptcy does, taking 12 months to complete – and at the end of this period what you owed is wiped. To find out more about DROs we have a section on the site with all the information you need.

We hope this guide has helped if you have been considering bankruptcy or have received demands from creditors.

For further information or advice, our expert team of debt advisors are here at PayPlan to answer any questions you may have on how to avoid debt and fix your finances.

You can get in touch via 0800 316 1833 or use our free callback service.