The dreaded B-word, bankruptcy is an increasing possibility for many families and businesses and it can appear to be an attractive alternative for those struggling to pay off large debts, but what may seem like a get out of jail free card does have some long term implications that can be far worse

The first advice I would give to someone thinking about bankruptcy would be to get some free debt advice and look at all options especially an IVA before declaring yourself bankrupt, once the bankruptcy proceedings have started there can be no going back.

Once declared bankrupt by a magistrate, you will find yourself in a very limited position within the world of finance; it will be impossible to get a mortgage or a credit card, all assets will be lost such as house, car etc and there are restrictions on being a managing director or in charge of a company. You may also lose your career and some professions will not employ those who are or have been bankrupt. As well as all of this there is the social stigma; bankruptcy is advertised in local papers and if you are renting a property then the landlord will be informed.

The best alternative I’ve seen to bankruptcy is an IVA (Individual Voluntary Arrangement) which is similar to bankruptcy but is not surrounded by so much doom and gloom. It is a voluntary agreement between the debtor and the creditors on a settlement figure, and this is paid into a fund over a 5 year period. Interest charges are stopped and the creditors are not allowed to pursue any further legal action against the debtor. Having an IVA rather than declare yourself bankrupt has numerous advantages, the main being that you can keep your house and car (if it’s small and essential). The affordability of monthly payments is agreed in advance and fixed so there are no unexpected sales of assets. Employers do not require information about current or previous IVAs and having an IVA will not be printed in the paper. Your credit rating will not be harmed as much, but it will still be poor. I can’t see why anyone would choose bankruptcy over an IVA unless the creditors cannot agree on a figure for repayment or they wish to carry out an investigation into the debtors affairs.

It is never really in the best interests of the creditors to make someone bankrupt as they usually will get less of their money back through bankruptcy than if they agreed an IVA with the debtor. Court costs of bankruptcy are very high and repossessed houses that have quick sales do not achieve their maximum price.

As the credit crunch goes into full swing it seems likely that bankruptcy and IVA cases will increase as the nation falls further into debt. If you are teetering on the edge of financial collapse or ruin then get some free advice and take some weight off your mind.