There are several formal alternatives to bankruptcy that could provide a solution to serious debt problems.
An administration order is a county court order that allows you to make a single payment every month into the court towards repayment of all your debts, instead of paying your debts directly to different creditors.
The court then divides the money between your creditors in proportion to how much they are owed.
You can apply to the court for an administration order if:
- you have at least two debts
- the total of your debts is less than £5,000, and
- you have at least one county court or high court judgment against you
An administration order stops your creditors taking further action against you, unless they get permission from the court. It also stops any further interest or charges building up. Once you have cleared your debts, the administration order will come to an end.
If there is no prospect of you repaying all your debts within a reasonable period, normally three years, the court may decide you only have to pay off only a percentage of the debt, and the rest will be written off. This decision is called a composition order, and forms part of the administration order.
Complete form N92 to apply for an administration order.
Keep up the repayments ordered by the court. If you don't, it is possible for the court to cancel the order, which will leave your creditors free to pursue you for your debts individually.
Individual voluntary arrangements (IVAs)
An individual voluntary arrangement (IVA) is a legally binding agreement between you and your creditors that enables you to repay a proportion of your debts through payments you can afford. The agreement is for a set period of time, usually five years. At the end of this period, any outstanding debt is written off.
If you have been served with a statutory demand for payment, you should consider if an IVA will be a better option for you than being forced into bankruptcy, particularly if you have enough income to pay your creditors a significant amount each month.
You will need to act quickly, as your creditor can start bankruptcy proceedings 21 days after the statutory demand is served. When deciding whether to accept the IVA, your creditors will probably consider if they are likely to receive more of the debt through an IVA than they would under a bankruptcy order.
You cannot apply for an IVA yourself. You will need the help of a qualified insolvency practitioner. You can ask a debt adviser to refer you to one or you can approach one yourself.
Check the costs of using a private insolvency practitioner. It might be better to contact a debt advice charity, as some provide this service for free.
An insolvency practitioner helps you to prepare a proposal for an IVA to put to your creditors and sets up a meeting to allow your creditors to consider your proposal.
The IVA can only go ahead if enough of your creditors agree. You need to obtain the agreement of creditors whose loans add up to at least 75% of the value of your debt. For example, if your overall debts amount to £20,000 and you owe one creditor £10,000 then that creditor's vote alone is worth 50%.
If you are a homeowner, in many cases an IVA may allow you to keep your home. However, the agreement may involve your creditors taking a share in any equity you may have in your property.
Debt Relief Orders
A debt relief order (DRO) may be an option if you have few assets, very little income and are not able to repay your debts within a reasonable time.
A DRO could provide a solution to your debt problems if:
- your unsecured debts total less than £20,000
- you have less than £50 disposable income per month, and
- your savings and assets are worth less than £300 – including the value of a private pension
- you are not a homeowner
You cannot get a DRO if you already have a bankruptcy order or IVA, or had already applied for a DRO in the last 6 years.
If you can obtain a debt relief order, creditors who are listed in the order will be prevented from chasing you directly for payment and your total debt will be usually be written off after 12 months. You will not be allowed to make direct payments to the creditors included in the order. You will remain liable for some debts that cannot be included in the DRO, such as court fines, child support and student loans.
A debt relief order can be cancelled if your financial circumstances improve so that you are able to make payments to your creditors.
A debt relief order is obtained through an application to the Insolvency Service and does not involve the courts. The application must be made through a skilled debt adviser working for an approved organisation, including Shelter's debt services.
Debt management plans and other solutions
If you can't afford to make the contractual payments on your debts, a debt management plan set up with the help of a qualified debt adviser could provide a solution to your debt problems.
These plans are set up without involving the courts and only cover unsecured debts.
Get advice about debt and alternatives to bankruptcy
Use Shelter's directory to find a face-to-face advice centre in your area.
Last updated 01 Jan 2015 | © Shelter