For most people, financial problems start slowly and get progressively worse. Getting into debt is easy, but as anyone who has been seriously in debt will tell you, getting out of debt is another matter altogether.

Having debt is OK as long as you can service the debt and pay it down. We take out mortgages to buy houses and loans to buy cars and make home improvements, for example. However, when debts mount up and it gets to the point where you are playing musical chairs with your money, it’s time to take some action, especially if the collection agencies are knocking.

Getting to the point where debt is a problem is often quite insidious, but loss of a job or an unexpected expenditure can leave you in a financial predicament. There are, however, usually warning signs that debt is spiralling.

Unfortunately, all too often the warning signs of being in financial trouble are ignored. Then, when finances hit an all-time low, it can suddenly seem like there is no other way out than to file for bankruptcy.

But how do you know if bankruptcy is the right thing to do? There are several major consequences of personal bankruptcy, so it is incredibly important you seek professional advice before taking such a big decision.

Speak to your personal Financial Advisor or get in touch with the Money Advice Service who offer free and impartial money advice. The important thing is to research the options and not take any knee-jerk decisions.

How to deal with debt

When dealing with overwhelming debt it is important not to:

  1. Panic
  2. Borrow more money
  3. Ignore the problem

Your first step before you rush into any decisions about bankruptcy or any other options for dealing with mounting debt, is to seek professional advice. The debt charity, Step Change offer free advice on how to deal with a debt problem.

Martin Lewis, founder of MoneySavingExpert.com, advises those in debt to work through a debt problems checklist to sort spending, cut the costs of debt, and determine how best to deal with problem debts before making any rash decisions.

What is bankruptcy?

Bankruptcy is a form of insolvency. It is one option for sorting out debt problems. You can only file for bankruptcy if your unsecured debts are more than your assets. Bankruptcy should be seen as the last resort as it will have a serious impact on your life. For more information on the impact of bankruptcy on your job and work, see here.

There are pros and cons to bankruptcy, so it is essential you understand all of the possible advantages and disadvantages according to your situation. Going bankrupt is a big decision. Be sure you know what is involved and how it will affect you before you declare bankruptcy.

Be aware, that it’s not only you that can declare yourself bankrupt. Someone else you owe money to (a creditor) can also apply to make you bankrupt (even if you don’t agree). For someone to make you bankrupt you have to owe them at least £5,000.

What are the alternatives to bankruptcy?

If you find yourself in financial difficulties, there are a number of options you should explore before deciding what to do. Here are some bankruptcy alternatives:

Individual Voluntary Arrangement (IVA) – this is an agreement between you and your creditors for you to repay all of the debt or some of the debt and have the remainder written off. You make regular payments of an agreed amount to an insolvency practitioner who divides this money between your creditors. For more information on paying off your debts using an IVA, see here.

Debt Relief Order (DRO) – this is similar to bankruptcy, but is only applicable to certain circumstances. You must owe less than £20,000, have assets less than £1,000, have a disposable income of less than £50 per month and you can’t own your own home or own a car worth more than £1,000. For more information on what a DRO is and other related questions, see here.

Debt Management Plan (DMP) – a DMP is an option if you have a limited amount of money left in your disposable income to pay towards your debts. You need to have at least £5 per month to pay each of your non-priority debts after paying essential outgoings and priority debts. With a DMP you pay a debt management company who pay your creditors for you.

Some private debt management companies charge a fee for this service, so make sure you choose one that doesn’t sting you with fees. For more information on DMPs, see here.

Loan Consolidation – this involves repaying existing debts with one bigger loan. This can make the monthly repayments on debt more manageable and reduce the overall interest you pay.

Is a loan really a viable alternative to bankruptcy?

Consolidating debt into one loan with more affordable monthly payments is only a good idea in certain financial situations. Before you consider how to deal with your debt, you need to have a clear understanding of your current financial situation. If you can afford to service your debt and pay it off by improving the payment terms, a debt consolidation loan could be a good option.

If you find you are not eligible for a loan due to your credit rating, you may still be able to consolidate debt using a guarantor loan. This means a friend or family ‘guarantees’ to cover your payments if you can’t.

Guarantor loans generally have higher APRs than other types of loans, but other than that they are generally low-risk and may be a better alternative when considering the consequences of bankruptcy, especially if you have a realistic confidence in your financial future.

A loan may be a viable alternative to bankruptcy for you, but only if you are able to comfortably cover the repayments.

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