Although, the recession has not directly affected all; in many homes, the recession has brought about extra burdens; hours of work being cut, unemployment and loss of job, rising interest rates on variable loans; as well as, the upward movement of the cost of living.  All of these factors contribute to one thinking the answer is simple, bankruptcy.  Fortunately, for UK residents, bankruptcy does not have to be your final option.

There are more lenient measures you may want to consider; perhaps an Individual Voluntary Arrangement or IVA.

Individual Voluntary Arrangements are simply arrangements made between the debtor and the creditors that he or she owes.  A certain percentage of the debt is paid on a monthly basis over a period of time; most generally, five years or less.  An insolvency practitioner will work with both the debtor and creditors to ensure the agreement is met by both parties involved.  Although, not as restrictive as bankruptcy, an IVA can mean losing some of your assets; even your home.

There are certain criteria to meet for those wishing to avoid bankruptcy and apply for an IVA.  First, you generally cannot owe more than £15,000; as well, at least 75% of the creditors owed must agree to the terms and conditions.  IVA’s are generally paid over a 5 year period of time; therefore, your payments may be higher than you can afford.  As well, IVA’s are costly to the debtor, however, these fees are figured into the monthly payment.  IVA’s are also reported on your credit history; and many financial institutions look down on these types of hardships just as harshly as a recorded bankruptcy.

Bankruptcy should always be a last resort for those that are struggling to pay their bills.  Bankruptcy affects your credit scores and can stay on your credit history for six years.  Most assets, including your home, are not exempt from sell to pay your creditors.  As well, future assets may be obtained to pay your debt.  Bankruptcy is also a public matter, many newspapers including the London Gazette lists names of those bankrupt.  Most financial institutions will not allow for bankrupt individuals to open new accounts; as well, loans from future creditors amounting to over £500 must be given information regarding your bankruptcy.

Bankruptcy is very expensive for those that seek this avenue; in fact, more assets may be seized to pay court fees and insolvency services.  In most cases, bankruptcy does require the debtor to pay some of the amount owed, but not all and not as much as with the IVA from above.  Bankruptcies, once discharged, will ultimately release the debtor from their creditor’s obligations; as well, the creditors will not be able to pursue any further action.

IVA’s and bankruptcy should be considered only as last efforts; most financial advisors recommend contacting your creditors directly and inquiring about hardship programs.  Most credit card companies have this type of programs set up for their customers.  As soon as you are faced with a life-changing event involving your finances; don’t wait, call and explain the situation to your creditors.