An option for sorting out your debt problems might be bankruptcy. You can apply for bankruptcy if you cannot pay back your debts.

As well as applying for bankruptcy yourself, someone else you owe money to (a creditor) can apply to make you bankrupt, even if you don't want them to. For a creditor to make you bankrupt, you must owe at least £5,000. You can apply to be made bankrupt online.

Cost

There is a one off payment of £680 if you apply yourself.

Advantages of going bankrupt

When the bankruptcy order is over you can make a fresh start - in many cases this can be after a year. Other advantages of going bankrupt include:

• you no longer have to deal with your creditors
• you are allowed to keep household goods and a reasonable amount to live on
• creditors have to stop most types of court action to get their money back following a bankruptcy order
• the money you owe will be written off once your bankruptcy ends

Disadvantages of going bankrupt

• if you have surplus disposable income, you may be asked to make payments towards your debts for a period of 3 years
• it will be more difficult to take out credit while you are bankrupt and your credit rating will be affected for 6 years
• if you own your home and you cannot raise sufficient equity, the property might have to be sold
• some of your possessions might have to be sold, for example, your car if it has a high value (over £3,000) and any luxury items you own
• it may affect your employment, subject to your contract of employment
• if you own a business, bankruptcy may have severe consequences
• going bankrupt can affect future applications regarding immigration status
• your bankruptcy will be published on the Individual Insolvency Register

What happens at the end of bankruptcy?

Your bankruptcy will normally end after a year. The Official Receiver will tell you when it is over. Most debts that haven't been paid will be written off although some debts like court fines and Student Loans can never be written off.

In extreme cases the Official Receiver may apply for a Bankruptcy Restriction Order. This can last up to 15 years and will restrict your financial affairs. This order could be made if, for example, you do not co-operate with the Official Receiver, or you take on debts knowing that you won't be able to pay them back.

Public record

Your bankruptcy will be added to the Individual Insolvency Register. This is a public record. The record is removed after the bankruptcy ends. Your bankruptcy will stay on your credit record for at least 6 years.

An Individual Voluntary Arrangement (IVA) is essentially a legally binding agreement with your creditors to pay your debts. It is governed by the Insolvency Act 1986 and the associated Rules. You will need to use the services of a Licensed Insolvency Practitioner (IP) to set up an IVA and the IP will monitor and oversee it whilst it remains in force. You agree to make regular payments to the IVA and these are paid to your creditors by the IP after deducting their fees.

An IVA can give you more control of your assets than bankruptcy.

Get an Individual Voluntary Arrangement (IVA)

You will need to use an IP to get started. They will advise you as to the suitability or otherwise of proposing an IVA.

Your IP will help to make the offer to your creditors including an affordable repayment and the period of the IVA. The period is usually five years but is often extended if you are a homeowner.

Your IP will go through your financial details with you and prepare a proposal. Once you are happy with the proposal, a meeting of your creditors will be convened. This is a virtual meeting so you do not have to attend. 75% of the voting creditors must vote to approve the proposal before the IVA comes into effect. It is then binding on all of your unsecured creditors. Your creditors can no longer pursue you for the debts, whilst the IVA remains in force.

Your responsibilities

Your IVA can be failed if you don't keep up your repayments or other terms of the IVA. Every year you will be required to provide details of your income and expenditure so that the level of payments can be monitored.

While you have an IVA you still have to pay your normal household bills and certain debts such as Student Loans and court fines.

Public record

Your IVA will be added to the Individual Insolvency Register. This is a public record. The record is removed after the IVA ends. Your IVA will stay on your credit record for at least 6 years.

Completion

When you have successfully made all the payments and adhered to the terms of the IVA, you will receive a Certificate of Completion. This is your proof that the IVA was successfully completed. All debts bound by the IVA are legally written off at this time and cannot be pursued.

This is very similar to a DMP but you set it up yourself. This means contacting your creditors directly and negotiating a monthly payment with them.

You will probably need to prepare a list of assets and liabilities, income and expenditure beforehand.

Creditors may not agree to your offer and may require more money each month.

Under an informal arrangement you will pay your debts in full so a longer time period may be necessary. You can ask your creditors to suspend interest and charges, although your creditors do not have to agree to this. An informal arrangement is not legally binding so creditors can still pursue you despite the plan being in place.

Eligibility

Informal arrangements can only be used to pay 'unsecured' debts so any mortgage arrears, court fines, Student Loans and debts due to HMRC (including tax credit overpayments) have to be paid outside of the arrangement.

Your responsibilities

Your creditors can cancel the arrangement if you don't keep up your repayments.

A Debt Management Plan (DMP) is an agreement between you and your creditors to pay all of your debts.

A DMP is usually used when you can only afford to pay creditors a small amount each month or there is a short-term problem that means that you need a temporary reduction in your debt repayments.

You can arrange a plan through a licensed Debt Management Company, usually for a fee. There are non fee paying companies and charities but you should always ask at the outset how these organisations are funded. If you arrange a DMP with a company you will make monthly payments to the company and the company shares the money out between your creditors, after deducting its fees.

Get a Debt Management Plan

Contact an FCA authorised Debt Management Company. The company will work out your monthly payments. You will have to give details about your financial situation, such as your assets, debts, income and creditors. The company then contacts your creditors and asks them to agree to the plan.

Under a DMP you will pay your debts in full so a longer time period may be necessary. You can ask your creditors to suspend interest and charges, although your creditors do not have to agree to this. A DMP is not legally binding so creditors can still pursue you despite the plan being in place.

Costs

Some companies will charge an initial set up fee and a handling fee each time you make a payment. Make sure you understand the costs of your plan and how you pay for it.

Eligibility

Debt Management Plans can only be used to pay 'unsecured' debts so any mortgage arrears, court fines, Student Loans have to be paid outside of the DMP. Normally, any debts due to HMRC (including tax credit overpayments) cannot be paid through a DMP.

Your responsibilities

Your plan can be cancelled if you don't keep up your repayments.

A Debt Relief Order (DRO) is one way to deal with your debts as long as you meet the criteria.

A DRO normally lasts 12 months after which you will be discharged and your debts will be written off.

Obtaining a Debt Relief Order

Costs

There is a one time set up fee of £90.

Criteria

In order to qualify for a DRO, you'll need to meet the following criteria:

• You must have no more than £75 left over each month after paying your household bills (£50 in Northern Ireland)
• You can't own a vehicle that's worth more than £2,000 (£1,000 in Northern Ireland)
• You must not be subject to any current bankruptcy or IVA proceedings or have had debts written off by completing a DRO in the last six years. If you had a DRO approved in the last six years, but the debts weren't written off, due to the order being 'revoked' or cancelled, this doesn't apply
• Your current qualifying debt balances must not total more than £30,000 (£20,000 in Northern Ireland)
• You can't own assets worth more than £2,000 (£1,000 in Northern Ireland)
• You can't be a homeowner
• You must have lived in or run a business in England, Wales or Northern Ireland for the last three years

Acceptance

An official receiver will be assigned to deal with your DRO application. The official receiver will investigate all of your circumstances and can choose to decline a DRO if you've:

• Given away a property, any money or assets or sold them for less than they're worth in the last two years
• Favoured any of your creditors by paying one more than others in the last two years
• It's very important that you disclose as much information as possible so that the official receiver can make an informed decision. If you apply for a debt relief order (DRO) it's an offence to mislead the official receiver about your situation.

Restrictions

If you successfully apply for a DRO you cannot

• borrow more than £500 without telling the lender about your DRO
• act as a director of a company
• create, manage or promote a company without the court's permission
• manage a business without telling those you do business with about your DRO

If you want to open a bank account, you may also have to tell the bank or building society about your DRO.

The restrictions usually last for 12 months. They can be extended if careless or dishonest behaviour caused your debt problem. For example, you lied to get credit.

What you need to know

While you have a DRO you still have to pay your normal household bills and certain debts such as Student Loans and court fines.

DROs can be cancelled if your finances improve whilst the DRO is in force or you do not co-operate with the Official Receiver, for example if you don't give them the information they ask for.

Public record

Your DRO will be added to the Individual Insolvency Register. This is a public record. The record is removed after the DRO ends. Your DRO will stay on your credit record for at least 6 years.

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