The irony is that the debt relief solution that is most suitable for people with extreme financial difficulties (bankruptcy) is the one that is not free. Not only that, it requires you to pay an up-front fee.

Informal Debt Relief

There are a wide range of companies and charitable organizations offering informal debt relief solutions. These usually involve either persuading the creditors to accept a longer time period for the repayment of their debt (debt management plans) or persuading them to accept a figure that is lower than the debt owed (debt write-off). None of these solutions are legally binding on the creditors and so rely on the experience of the debt management/counseling company and the particular mix of creditors for their chances of success. With informal debt relief it is always possible to find debt charities that will work with you for no fee or companies that will only charge a fee if they arrange a successful resolution. In this way, if the fee is taken out of the settlement to the creditors then their services can be effectively free to you, the debtor.

Supervised Debt Relief

This includes Individual Voluntary Arrangements (IVAs) in the UK and Chapter 13 bankruptcy in the United States. These debt relief solutions require the services of a qualified person to setup and monitor the agreement (which typically involves paying back a proportion of the debt owed over an agreed period) and the involvement of the court to ratify it. The requirement for legally qualified advice and the involvement of the courts mean that these debt relief solutions are never free. In some circumstances they can be structured (in the UK) so that the fees are taken from the agreed monthly payments, meaning no up-front fees.

Bankruptcy

I’ll say it again, it seems very unfair that a debt relief solution that you would probably only select if you were in a financial crisis requires you to pay an up-front fee. Both in the US and the UK there are court fees to be paid to declare yourself bankrupt (in the US this applies to both Chapter 7 and Chapter 13 bankruptcy). The only hope of being able to declare yourself bankrupt if you cannot raise the court fees is to look for a local charity that will pay your bankruptcy costs. These do exist but you will probably need to do some local research to find them, and be prepared to justify why you need their help.

What are the Consequences of Going Bankrupt

In the UK, the consequences for bankrupts are quite severe. You will have your bank accounts frozen, you will have to sell any major assets that you own (house, car etc.), and you may have to pay some money each month out of your income to the insolvency service (this is quite rare). Certain professions do not allow you to be a bankrupt, e.g. accountancy or police.

You will not be able to obtain credit whilst you are bankrupt and you will find it extremely difficult to obtain once you have been discharged from your bankruptcy.

There is a risk of a criminal conviction if the investigation into your finances finds that you were reckless in the way that you got into debt (e.g excessive gambling etc.) and had no intention of paying it back. These types of convictions are quite rare and will only be applied in the most serious of circumstances.

What are the Benefits of Bankruptcy

Bankruptcy is the quickest route to becoming debt free. Once you have presented your petition and been declared bankrupt you will immediately be free of all your unsecured debts. This compares favorably with the timescale for an individual voluntary arrangement that can take 5 years or more to clear your debts.

Alternatives to Bankruptcy

If your situation is serious enough to consider bankruptcy then the only realistic alternative that will resolve your debt problem in a reasonable time is the Individual Voluntary Arrangement (IVA). This is suitable for people that have a profession that will not allow bankruptcy and also makes it more likely that you will be able to keep your home. As previously noted it will take longer to resolve your debt problems (5 years is the standard period but this can be shortened by making a lump-sum payment from a remortgage). There will be no investigation into your finances other than the proposal that the Insolvency Practitioner puts forward to your creditors.

Making the Decision Between Bankruptcy and an IVA

You should always seek qualified advice when deciding between bankruptcy and an IVA. The following is offered as guidance only:

You should try to arrange an IVA if: You have significant assets that you want to protect. You are in a profession that doesn’t allow you to be bankrupt. You are worried that your conduct might leave you open to criminal conviction.

You should consider bankruptcy if: You don’t own you own home. Your job is not money related and there are no known restrictions on you becoming bankrupt.

There is a strong human instinct to simply try and hide when serious and difficult problems are around. Unfortunately this approach may have worked for our ancestors when confronted with hungry predators of some sort, but it is absolutely the worst thing that you can do with a debt problem.

4-Step Plan to Get Help and Clear Your Debt

1. Find a qualified source of free debt advice, either a charity like the Citizens’ Advice Bureau or a respected debt management company, and make an appointment to see them

2. Write down a list of all your debts with outstanding balances. This might be a bit scary, but unless you can see the size of the problem you won’t be able to sort it out.

3. Prepare a detailed and realistic family budget showing all of your income and all of your essential outgoings on a monthly basis. This will show you the size of your debt problem and will help you and your debt advisor in assessing the most suitable form of debt solution. Your debt advisor will help you prepare a budget, but there is no harm in doing some of the work yourself.

4. Research the various different forms of debt solution (Informal Arrangements, Debt Management Plans, Individual Voluntary Arrangements, Full and Final Offers and Bankruptcy) so that you can have an informed discussion with your debt advisor when you meet with them.

Act Now and Start Your Journey to Becoming Debt Free

If you do nothing you will be in the same situation in 6 months time, dreading the phone ringing or another batch of threatening letters. Just imagine how much better you will feel if you have started to take control of the situation and moved that bit of the way down the debt resolution path. All forms of debt relief take some time to complete (a typical IVA can last 5 years), and sometimes that can put people off starting the process, but the longer you delay the more you are delaying the arrival of your debt free life.

I was in the middle of a debt crisis 4 years ago. Things only started to get better when I admitted to myself (and my family) that I had a problem and started to do something about it.

Who Should You Talk to About Dealing With Your Debt Problem?

At first it doesn’t really matter who you talk to, just find someone that you know will be a sympathetic listener and let it all out. If there isn’t anyone that you feel comfortable talking to then try an online forum or blog to start with.

If you are hiding your situation from your partner/immediate family then you will really have to tackle this soon. Unless you are confident of being able to pay off your debts with no affect on your credit history then your situation WILL have an impact on your partner. The knowledge that they will find out sooner or later about your situation should help you to be brave and tell them now. The later you leave it the bigger the problem and its impact on your relationship.

Next Steps

Once you have broken your silence you should find it easier to talk to other people about your debt problem. You should definitely get some free debt advice from a charitable organization or company. Make sure that you do not pay anything for debt advice at this stage as there is no need to. Research the main different types of debt solution (debt consolidation, informal arrangement, debt management plans, IVAs and bankruptcy) and try and work out which would be best for you.

Conclusion

Keeping your debt problem hidden will often make sure it gets worse or doesn’t get resolved. Seek out the help and support that you need (both professional and personal) and you will start on the journey towards a debt-free future.