Alternatives to Bankruptcy
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Filed under Bankruptcy
Bankruptcy may seem like a quick-fix solution to credit woes, but it is far from it. Bankruptcy declaration brings down the credit score significantly, creating a negative mark on the credit report. This makes lenders hesitant to grant further credit. Moreover, potential landlords and employers may also interpret it to be a sign of instability and risk, resulting in rejection. Bankruptcy filing must only be resorted to when all alternatives to bankruptcy have been reviewed and exhausted.
Common Alternative to Bankruptcy
Individuals, who are on the brink of bankruptcy, can consider the following standard alternatives to bankruptcy:
Asset disposal: Individuals have to hand over a bulk of their assets to a bankruptcy court after filing bankruptcy. Individuals may as well do it themselves, to avoid the hassles associated with bankruptcy. One must not hesitate to downsize by opting for a smaller house if it means avoiding bankruptcy.
Debt restructuring: Individuals can reduce their burden of debt by getting it restructured. Debt restructuring involves negotiating with creditors for either lower interest rate or reduced debt amount. Remember, creditors would rather lower the credit terms, than risk facing a loss arising out of bankruptcy.
Special Alternatives to Bankruptcy in the UK
Individuals having limited assets and income can file for the following special orders as an alternative to bankruptcy.
For instance, in the UK, individuals can file for a:
Debt Relief Order (DRO)
DROs last for a year, during which creditors are barred from taking any action for recovering their funds, without court permission. At the conclusion of this period, if the debtor’s circumstances have not improved, s/he is freed from the remaining debts. Debt Relief Orders are not administered by bankruptcy courts. Instead, they are governed by ‘The Insolvency Service.’
Administrative Order
When an individual is faced with an involuntary bankruptcy filing, s/he can apply for an administration order from the bankruptcy court. Administration is a court procedure, wherein the defaulters are required to make periodic payments to the court. This is later used for clearing the credit outstanding. The court does not charge any fee for an administration order. However, the court deducts a small fraction from the funds deposited by the defaulter towards its costs. Failure on the debtor’s part to make regular payments results in cancellation of the order and transfer to a bankruptcy status.
Alternatives to bankruptcy must given special attention so as to avoid building credit from the scratch, which can be a lengthy and agonizing procedure.