“Declare bankruptcy and all your debt worries will be over.”
“Declare bankruptcy and you will lose your home, you might be put in prison and all of your possessions will be sold to pay your debt.”
Two extreme points of view often held on either the benefits or the perils of declaring bankruptcy. As ever in life the truth is somewhere between these two extremes.
So What is Declaring Bankruptcy?
Bankruptcy it a legal status that means that you are unable to pay your unsecured debt. It does not directly effect secured debt. The procedure and implications are exactly the same whether you have been declared bankrupt by a creditor or you have declared yourself bankrupt. When you enter bankruptcy all of your unsecured debts are wiped out (except for certain specific debts like student loans).
What Happens When You Become Bankrupt
You will enter a period when your financial affairs are not under your control. As you have failed to pay back your debts your finances will be managed to try and produce some money to pay your creditors back. You will not be able to obtain new credit until your bankruptcy has been discharged, usually in less than a year. Any major assets that you have will be sold to try and raise money to pay back your creditors. Your bank accounts will be frozen and you will have to open a new basic bank account (one that has no overdraft facility). You will have to attend an interview with the Insolvency service to go over your financial affairs and the reasons for your bankruptcy.
What Happens to my House?
If you own your house then your share of it will need to be sold to help pay off your creditors. If your partner or a family member is able to buy your share of the house at market value then this will remove it from the danger of being sold. If you cannot do this and you share your house with your partner/family then you will have at least a year before the house has to be sold.
Will My Other Possessions be Sold?
Only valuable possessions are at risk of being sold, e.g. cars, boats, antiques etc. The insolvency service are typically not interested in everyday household items. They cannot seize items that are either jointly owned or required for basic living. Even your car might be safe if you can prove that it is required for your work.
Will I Have to Pay Some of My Earnings?
In theory if you earn enough then you can be made to pay an amount each month for 3 years. In most cases this will not be the case. Remember when filling in the forms that your partners income should not be included in the equation, i.e. if you have rent, food, utility bills it is perfectly acceptable for you to say that you pay all of them. This fact alone means that most people do not have any additional income to be paid into their bankruptcy.
How Long Will my Bankruptcy Last?
Rules have been relaxed so that the maximum period for most personal bankruptcies is a year. Many will be discharged in six months or even less. After this time you are free to conduct your life as you please, although you will experience trouble getting credit for a number of years since the bankruptcy will stay on your credit file.
Tags: Bankruptcy, Debt Advice, debt assistance, Debt Problems, Debt Solutions
photo credit: SqueakyMarmot
If you are worried about your level of credit card debt then there are a number of solutions open to you. Exactly which solution you choose to reduce your credit card debt will depend on the size of the debt, and your income compared with your total outgoings. There are a number of helpful things that would be common to most situations:
If your credit score is still in good shape then look around for better rates of interest for your credit card debt. Zero percent balance transfers are not as common as they once were but they are still available. Use the reduced/free interest period to reduce your debt as much as possible.
If you are having trouble making enough money to pay your credit cards minimum payments then you have a problem. If you have missed any payments then you probably won’t be able to look around for a better deal, but it might be worth double checking. Try reducing your other regular monthly payments (e.g. insurance, utility bills etc.) by using a money comparison site. If you can reduce your monthly outgoings to the point where you can pay you minimum amount on your credit cards then you will eventually pay them off. If you can manage even a small amount more than the minimum payment it will reduce the length of time to pay off your debts significantly. It is important to point out that you should not be going short of food, clothes or basic things to pay off your debts. If this is the case then you should really (for the health of you and your family) be considering some for of debt solution that will bring your monthly payments down.
If you cannot adjust your budget to the point where you have enough money to pay your credit card bills each month then you will have to consider more drastic measures.
1. You could consolidate your debt into either a secured or unsecured loan. It would probably be best to try and avoid a secured loan if you can, since problems with paying this debt could result in you losing your home. Be very wary about any form of consolidation. You have to be absolutely certain that you will not build up credit card debt in the future. Also, if you have problems with your unsecured debt in the future a consolidation loan will increase the amount that you owe your creditors.
2. You could try an negotiate reduced payments with your creditors. Either yourself or via a debt management company or charity. This may be a good solution if you have a relatively small debt.
3. If your debts are larger you may be suitable for an individual voluntary arrangement (IVA) which will write-off a proportion of your debts leaving you to pay only what you can afford. This needs to be negotiated for you by an specialist company. Beware any that try and charge you large up-front fees.
4. You could investigate declaring yourself bankrupt. This is debt solution that will have the most negative effect on your credit score and future ability to get credit. However it is the quickest way to become debt free and is very suitable for people that don’t own their own home.
Tags: Bankruptcy, credit card debt, Debt Advice, debt assistance, Debt Problems, Debt Solutions
Most people who have debts would admit (if pressed) that they would love to become debt free. The key to becoming (and staying) debt free is to have a budget. I know this sounds obvious and boring but it cannot be stressed enough that it is the bedrock of sorting out your debt problem and making sure that it does not return.
Make time to write down all of your regular monthly outgoings. Your bank statement is a good place to get this information. Most people’s monthly budget would include the following items:
Rent/Mortgage
Utility Bills (gas, electric, water)
Tax bills (e.g. council tax in the UK)
Insurance
Telephone
Pension contributions
Mobile phones
Internet
TV Subscriptions
Car loans
Personal loans
Credit card payments
Next add an allowance for food/clothing (if you’re not sure how much this is then keep a diary for a month and total up how much you spend).
If you need to, then make an allowance for luxuries such as eating out/leisure activities/holidays.
Now total up your income, not forgetting to include your partners income (if appropriate) and any benefits that you might receive on a regular basis.
Your path to becoming debt free depends on the relative size of your total outgoings and total income.
If your total income is more than the total of all your outgoings (including allowances for all luxuries etc.) then you don’t really have a debt problem. Simply allocate all of the surpless each month to paying off your debts and in time your debts will be gone.
If your total income is more than all of your total outgoings except the luxury items then you are going to have to make some lifestyle changes to pay off your debt/stop accumulating any more. Cut down on eating out/go to cheaper restaurants. Go on fewer/cheaper holidays. Look at the amount that you spend on things like mobile phones and TV subscriptions. Checkout a money saving site (such as MoneySavingExpert) to see if you can reduce the cost of utility bills/insurance credit card payments etc. Investigate whether you can pay off any car loans by selling the car and driving a cheaper one (be careful if trying to do this since the car is actually the property of the loan company until the loan is paid off). Use the surplus that you generate to pay off your debts. Also if you have any savings then use these to pay off debt as you will almost always save more in interest paid than you could earn by investing.
If your total income is more than all of your regular outgoings but less than the amount that you need for all the regular payments that you need to on your debt (loans, credit cards, car loans) then you have a potential debt problem. Take the steps described above to try and get your monthly budget to balance. If you can then you will just have to carry on paying off your debt until it becomes more manageable. If not then you should stop accumulating any more credit (unless your problem is going to be very short-lived, e.g. 6 months or less) and consider a debt solution. More on the different types of debt solution available in another post.
If your total income is less than your essential outgoings then you have a bigger problem. You will need to work at reducing the size of your outgoings (by all the steps described above) and if this doesn’t reduce them by enough then you will have to consider moving to a smaller house/refinancing your mortgage to reduce monthly rent/mortgage payments. No debt solution will help you to cope with your situation if you cannot meet your regular essential monthly requirements.
The last option that I will mention, that applies to all of the above cases is to try and increase your income by taking on different or additional work or investigating whether you are entitled to any benefits or tax credits. I mention this last because it is often something that people use to postpone doing something about their debt problems. They will say “I’m getting a pay rise soon” or “I’ll take on a part-time job when I’,m a bit less busy” or most dangerous of all “the business that I am starting will save me”. It will take me another post to explain why these options are usually no help.
For all of the above if you feel you need help then there will be an agency that can assist you. In the UK try the Citizens Advice Bureau.
Tags: Debt Advice, debt assistance, Debt Problems, Debt Solutions
