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It is easy for circumstances to change and for what was once a comfortable lifestyle with adequate income to become a real challenge. Most people get into financial problems through a change in their personal circumstances like, for example, loss of job, divorce or long term ill health. Despite struggling to keep up repayments, the stress and challenge becomes too great and other alternatives have to be explored to get life back to normal.
If caught early enough or if the debt is not too great, either a voluntary debt management programme may be enough to get things back on the straight and narrow. This is an informal arrangement between the debtor (the person owing the money) and the creditor (the person to whom the money is owed) on how the debt will be repaid. This can be a reduced monthly payment for a longer term or a consolidation of debts into a single, facility with lower payments over a longer term. However, as this arrangement is voluntary, the creditor can change their mind and seek more aggressive repayment of their debt, including repossession.
A more formal arrangement between debtor and creditor is a Protected Trust Deed (in Scotland) or an Individual Voluntary Agreement (IVA) in the rest of Great Britain. In Scotland, if the Trust Deed is Protected it is necessary to write to all creditors and place an advertisement in the Edinburgh Gazette. Otherwise, this arrangement is confidential. Both debt managementProtected Trust Deeds and IVA's must be arranged in conjunction with professional advice sought through an Insolvency Practitioner. These formal arrangements to repay debt are agreed by the creditors and last for 3 - 5 years after which any outstanding debt is written off. Under these arrangements all assets and cashflows are taken into account (including any surplus equity in a property that may be owned) when assessing how the debt will be repaid.
It is possible to petition for your own bankruptcy or to have a bankruptcy order granted to one or more of your creditors. Here, all assets are surrendered and there are strict limits on the amount of credit you can raise and the income you are allowed to keep from any work. Certain jobs will not employ bankrupt persons and the details will be widely published in newspapers and journals. The period for which you are bankrupt will be from at least one year (unusually short) to 10 years. It is very difficult to get out of bankruptcy and all money will be at the discretion of the Trustee.
At the end of the bankruptcy period, all debts will be written off but the record will remain with you meaning that obtaining credit of any kind could become difficult.
Bankruptcy is a serious option and you should seek advice on all options before taking any action. Initial help can be obtained from any Citizens Advice office or from an Insolvency Practitioner.
