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What happens when you declare yourself bankrupt and what are the alternatives?

The onset of the financial crisis prompted sharp rises in the number of people becoming insolvent, as rising costs coupled with squeezed incomes and wide-scale redundancies forced individuals to desperate measures to solve their debt problems.

It is only since the start of 2013 that there has been a real fall in the number of personal insolvencies in England and Wales, following consistent rises since the onset of the financial crisis.

But the danger of bankruptcy is ever-present even in the most fruitful economic climates, and This is Money has put together this guide to explains the ins and outs of bankruptcy and the alternatives available for those struggling with debts.

Mired with debt: Bankruptcy is the most extreme action you can take to recover from yours debts, but there are other alternatives.

Declaring bankruptcy

Declaring yourself bankrupt should always be considered a last resort for those mired in debts they feel unable to pay off.

It is a viable, if undesirable, option for those with no income, no assets, and large debts they can't pay off.

But it is even less desirable for property owners - who could end up having to sell their home - or those with professional qualifications (ie. solicitors) who can be barred from practising were they made bankrupt.

You can either apply for bankruptcy in court yourself, or your creditors can apply for bankruptcy on your behalf as they attempt to recover what they are owed.

To apply for bankruptcy comes with a hefty £700 charge - a £525 deposit for the official receiver and a £175 court fee, though sometimes the court fee is waived for lower earners.

Bankruptcy lasts for 12 months after which the bankrupt is 'discharged' from their remaining debts.

Typically being declared bankrupt makes it difficult for those still within their 12 month period from getting even the most basic of bank accounts.

This is because banks have been put off by insolvency law which has meant creditors can hold them responsible for money that comes into a bankrupt's account and is spent, rather than used to repay the debt owed.

But the law is being changed to prevent creditors from chasing banks for lost money without first giving notice of their interest in the cash.

If you are made bankrupt, the following restrictions apply for 12 months which mean you can't:

Borrow more than £500 without telling the lender you're bankrupt.Act as a director of a company.Create, manage or promote a company without the court's permission.Manage a business with a different name without telling people you do business with that you're bankrupt.Work as an insolvency specialist.   More... Eight simple steps to achieving perfect personal finances Dealing with bankruptcy How to get out of debt: Your ten-step plan to getting your finances back under control Looking to reduce your credit card debts? Find a balance transfer deal Could independant financial advise help you? Debt Relief Orders (DROs)

Debt relief orders are more recent introductions to the insolvency process which provide a similar but cheaper alternative to bankruptcy for those with debts of less than £15,000.

Compared to the £700 charge for going bankrupt, the official receiver's fee to get a DRO is just £90.

The same restrictions (listed above) for bankruptcy will apply to DROs, and they too will last for 12 months, at the end of which your debts are discharged.

You are eligible for a DRO if all of the below apply:

You owe less than £15,000.Have less than £50-a-month of spare income.Have less than £300 worth of assets (though you're allowed a car worth less than £1,000).Have lived or worked in England or Wales in the last three years.Haven't applied for a DRO in the last six years.Individual Voluntary Agreements (IVAs)

This is a legal, binding agreement you make with your creditors to pay back all or part of your debts over a set period, usually five years.

This money will be paid to an 'insolvency practitioner', who will divide the money between your creditors. Assets such as homes and cars will generally remain untouched, though you may need to release some equity in your home if the situation requires it.

This practitioner will work out what you can afford to repay and how long the IVA should last, based on your assets, debts, income and creditors.

Celebrity woes: High profile names to have been declared bankrupt in recent years include Martine McCutcheon and Kerry Katona.

Three-quarters of your creditors must agree to the IVA for it to go ahead.

You will however have to pay a set-up fee and a handling fee each time you make a payment to your insolvency practitioner to handle your IVA.

This makes it important to shop around for a practitioner and ask what their fees are before asking them to take on your case.

The IVA Adviser suggests that set-up fees can typically range from £1,000 to £1,500, while ongoing handling fees can be worth anything from £400 to £800-a-year. Though the total cost will depend on individual circumstances.

Your IVA is added to the Individual Insolvency Register, but it is removed three months after the IVA ends.

Administration order

You can apply for an administration order at your local court which will give you time to deal with your debts in the event you have a county court (CCJ) or High Court judgment against you that you can't pay back in full.

People with debts of less than £5,000 can make one payment a month to their local court, which will then divide this money between their creditors. To be eligible they must also owe money to at least two creditors and prove they can afford the repayments.

The court decides how much you will repay each month and for how long. It will also charge a fee with each payment, but it cannot be more than 10 per cent of your debt.

Debt management plans

These operate in a similar way to IVAs, though they are typically used for those with less serious debt problems.

These help you manage your debts and pay them off at a more affordable pace through a licensed debt management company, a list of which can be found here.

It will have an effect on your credit rating, but less so than if you have an IVA.

Unlike IVAs however, in which a certain amount of unmanageable debt can be written off, you will have to pay back the full amount in a debt management plan.

It is also incredibly important to shop around for a provider, as many companies will charge management fees of around 10 to 15 per cent of your payments.

Debt charities such as StepChange for example offer fee-free debt management plans.

Informal arrangements:

This non-legally binding arrangement can be made by agreeing with your creditors to pay back your debts at reduced payments over a longer period of time.

The issue with this is that, as it is not legally binding, your creditors may change their minds at any time and request higher payments, and they are under no obligation to accept lower payments in the first place.



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