Although there are plenty of things to know about bankruptcy and how to avoid debt, many people in Britain continue to experience problems with their creditors. Sometimes those problems are relatively minor, but sometimes they can impact on an individual’s credit rating for six years or longer. In the worst cases, bankrupts may even lose their homes, which is why every debtor should know how to avoid bankruptcy.
Planning financial affairs with care is obviously very important, as this is the first and most effective defence to bankruptcy. Sensible budgeting can do much to avert the threat of debt problems, but sometimes circumstances are beyond the control of borrowers. If income suddenly dips and the cost of living increases sharply, managing credit accounts as agreed with lenders can become impossible. This is when action must be taken to avoid bankruptcy and other undesirable consequences of defaulting on repayments, which include County Court Judgements (CCJs), repossession of property and a tarnished credit rating.
What is Bankruptcy?
Some people regard bankruptcy as a means of escaping their debts. There is no doubt that this is the ultimate aim of bankruptcy, but it would be inadvisable for debtors to treat the measure as a tool of convenience or opportunity. Bankruptcy should always be considered as a last resort. It provides people who cannot afford to pay their debts with a solution that involves losing most – sometimes all – forms of equity for a limited period of time.
Applying for bankruptcy is a relatively straightforward process. First, debtors should seek advice from a professional debt counsellor, accountant or solicitor. The debtor must then file a Bankruptcy Petition Form and find the £700 or so to initiate proceedings. After going to court and being interviewed by the Official Receiver, Income Payment Agreements are arranged and the debts are usually cleared within a period of one year.
Avoiding bankruptcy is important to escape the many negative consequences associated with it. One preventative measure available to debtors is the Individual Voluntary Arrangement (IVA), which is a legally binding repayment plan that must be agreed with creditors, the majority of whom prefer this option to bankruptcy. Details of an IVA stay on file for up to six years.
Aside from drafting a debt management plan, which is essentially an exercise in careful financial planning, borrowers may be able to rely on debt consolidation. Sometimes loans, credit cards and store accounts are subject to high rates of interest. Replacing all of these debts with a single, low-interest repayment is often far more cost-effective.