Bankruptcy is a serious decision to make. Be sure to weigh up the pros and cons before committing

Bankruptcy is similar to insolvency, which is the inability to pay ones debts as they fall due. Bankruptcy only applies to individuals and not to companies or corporations. There is a low instance of bankruptcy in the United Kingdom, but it does happen. One of the reasons the bankruptcy statistics are so low is because bankruptcy has a hugely negative impact on the credit rating of those who file for it. And the people know it. Not only is bankruptcy an ineffective way of dealing with debt, it also hurts the United Kingdom because the debts are sometimes “forgiven”. In some cases though, the debts are not forgiven. The courts of the United Kingdom dictate a new court supervised payment plan for the debtor.

Pros

• Peace of mind and an end to the madness of being in debt
• Possible forgiveness of debt and a chance at a new start
• Can ensure you are no longer chased for debt, as you are declared bankrupt

Cons

• Some people in certain lines of work will be forbidden from practicing their profession, never again allowed to practice in the field. Example: Accountants
• Obtaining any line of credit is a major problem and in some cases impossible. Lenders may require authorization for anything over £250.
• Mortgages after this point are extremely difficult
• All forms of unsecured loans are forbidden.
• Secured loans will carry exorbitantly high rates of interest – Too high for most people to look at as a valid option
  Both newspapers and court records will display your name as being officially bankrupt
• All of your financial operations will be then be under the full investigation of the law. Any discrepancies hold severe penalties, even prison time.

So you see, bankruptcy may be a valid last resort, but it’s the “end of the road” for people trying to create a financially secure life for themselves. While it doesn’t destroy your chances entirely, it certainly affects any possibility that you could conduct business in a traditional way. Basically, when you declare bankruptcy in the UK, you are putting the message out to all financial entities that you are not a worthy debtor. You’re saying that you don’t pay back your debts and let things get to the point where the government has to step in.Doing everything in your power to stay away from the dangers of bankruptcy is the best thing you can do as a citizen of the United Kingdom.

It never seems to simply forgive your debts, you have to carry the burden of never being able to secure a mortgage loan, you’ll never get an unsecured loan again, and any form of a secured loan you get will have very high interest rates. Basically, bankruptcy is equal to never being able to get an affordable loan again. Consider this before you ever even consider the potentially destructive option of bankruptcy.

The first thing you have to establish is exactly how much you owe. No matter how much you hate those bills you have to sit down, go through them and find out exactly how much more you have left before you finish paying off your debt. The best option would be creating an excel sheet where you add the outstanding balance, the interest rate and your monthly payment.

Once you have added all your debts now you need to decide which one to focus on to pay off first. Many advocate paying off the highest interest one off first while others feel that you should start with the smallest to highest. In either case you are going to use a system known as the debt snowball which means that once you have paid off one debt, the money going to that payment each month will be added to the next debt so you can pay that off quicker and so on and so forth.

To pay off that first debt faster you are going to have to make some changes which means drawing up a budget to see where all your money is going and if you can save anywhere. Depending on how quickly you want to pay off your debt you can cut out most things except for the essentials. No, chips and a pint every night are not essentials, we guarantee you will live without them for a while.

Every penny you save will go towards making extra payments on your first debt so you can pay it off as soon as possible. Once you have finished with the first one you will take the money you were paying on it every month and add it to the payments of the second debt until that one is finished and then move on to the next. This may seem a daunting task but you will find that paying off your debts and being well on your way to a stress free life can be quite an addicting feeling.

1. Before you buy that new gadget, shirt or new book step back and ask yourself if you really need it. Preferably give yourself 24 hours to think about it and if you still find you really want the item and it will be useful then make the purchase. But more often than not you will find that it was a thing of the moment spurred by great marketing campaigns and once you get home it will slip your mind completely.

2. Saving on food shopping does not have to mean eating stale bread with a side of water for the rest of your life but it does mean cutting down on all the food you buy, half of which you throw out anyway. Herein lies the problem, we buy so much food as if its going out of style and then we end up throwing it away because it has a funny smell. If you work out how much money you can save in a year by just not buying and throwing out so much food you may be shocked.

3. Make your own coffee at home. It really isn’t that hard and you are guaranteed that your cup of java is not going to cost you the equivalent of a small car in a year, unlike picking up your coffee from the local Starbucks every morning before you dash off to work. You can also try taking your lunch from home rather than ordering takeout or going to the pub and buy a second car instead.

4. Switch lights off in rooms after you are finished, turn off electrical equipment you aren’t using and don’t leave the water running for the sake of it. These small changes will cut your electric and water bills down significantly. Why should you pay for something that you aren’t even using?

5. Socializing is great and we all need to do it every now and again but that doesn’t mean eating out every night followed by drinks and, if you are in a generous mood, picking up the tab. You are just flushing money down the toilet and you will end up with a huge debt looming over your head and you won’t have anything to show for it. No one says you shouldn’t see your friends but have you ever considered cooking dinner and inviting them over to your place? It is not as difficult as it may sound and you will probably have more fun as well.

A few changes in your life can have you saving thousands every year which will help you pay off your debt or avoid it all together.

The first criteria which will make your choice extremely easy is that you can apply for an Individual Voluntary Agreement only if you have a minimum of £15,000 in debt to at least 3 creditors while a Debt Management Plan limits you to a minimum £8,000 in debt to 2 creditors.

One of the most important differences between the two, especially if you qualify for both, is that with an IVA you will be debt free in five years, regardless of how much you have paid off, whereas with a debt management plan you can end up paying it off for the rest of your life if the monthly repayments are small. Also, the fact that an IVA is a legally binding agreement means that your creditors cannot back out of it any time they feel like it, while a debt management plan carries little judicial weight. However, this legal character of an IVA means that if you cannot keep up with payments then you will most likely end up being made bankrupt. There is a very fine line between the good and the bad in this case.

On the other hand with an IVA you will be making monthly payments that can vary according to your earnings, in other words the more you earn the more you will be paying, whereas with a debt management plan you pay only the amount you want and feel can afford which is then fixed for the duration. One big problem with a debt management plan is that most of the companies who help you organise it require that you have an income and own your home which will be used as surety against your debts, while an IVA will protect large assets such as your residence.

Depending on your situation both plans can be a good choice. However, if you are in deep debt then maybe an IVA is your best option so that you can see the light at the end of the five year tunnel.