Debt Management Plans vs Bankruptcy – Which Is Best?

Debt management plans and bankruptcy are both ways to manage your debts if you are struggling to repay them, but they are at opposite ends of the spectrum in terms of how severe they are.

A debt management plan is an informal agreement between you and your lenders that aims to make it easier to repay your debts. Bankruptcy is a formal arrangement that can have a much greater impact on your life.

Will I Lose My Job?

Bankruptcy can affect your job if you work in certain professions. It can also be a problem if you are a company director or a pub licensee. Your ability to work may be affected even after you have been discharged from bankruptcy.

If you think that you might be affected it is worth taking advice before deciding what to do. If you are a member of a professional body, for instance, they should be able to give you advice as to what impact bankruptcy would have on you.

One other thing to bear in mind is the fact that bankruptcy can also make a difference if you are planning to apply for British citizenship or to sponsor an application that it being made by someone else.

Because a debt management plan is an informal arrangement, it should have no impact on your job.

Will I Lose My Home?

In theory, if you rent your home bankruptcy should make no difference. However, some tenancy agreements contain a clause that says you will lose your tenancy if you are declared bankrupt. You may also lose your tenancy if you have rent arrears when you are declared bankrupt.

If you are declared bankrupt and you own your own home it is likely that the official receiver will require you to sell it unless there is negative equity. Even if there is negative equity, the official receiver can make you sell your home at any point within two years and three months if by that point house prices have gone up and at that point there is positive equity in the property.

A debt management plan will have no impact even if you own your home, although if there is substantial equity in the property your lenders might insist that you release some of that equity to repay your debts before agreeing to your proposal.

Will I Lose My Car?

If you are declared bankrupt the official receiver will require you to sell your vehicle unless it is a relatively low-value vehicle and it is essential for you to have it. As an example, you would be allowed to keep a low-value car if you need it to get to and from work.

You won’t lose your car under a debt management plan unless you have a particularly valuable vehicle or a vehicle that costs a lot of money to run and your lenders decide that they won’t agree to your repayment proposal unless you sell the vehicle either to raise funds or to reduce your outgoing expenses.

Will People Find Out?

Obviously your lenders will be told that you are bankrupt. Your bankruptcy will also be recorded by the Insolvency Service and a small notice will be published in the London Gazette. If you are at risk of violence it can sometimes be possible to avoid having your address included in that notice.

There is no longer a requirement to publish details of your bankruptcy in your local newspaper. However, if you are particularly newsworthy there is nothing to stop that local newspaper reporting your bankruptcy. This might be the case if you were a celebrity or prominent local businessman.

Your employer will not be told that you have been declared bankrupt. However, they might want to know why your tax code has been reduced to zero. In practice, unless you work in a profession that places specific restrictions in terms of whether you are able to work in that profession if you have been declared bankrupt this will make little or no difference.

A debt management plan is a purely private matter between you and your lenders and so the only way anyone else would find out about the plan is if you told them.

How Much Do They Cost?

You need to pay a fee that is usually £680 if you decide to declare yourself bankrupt. This fee must be paid before you can go down the bankruptcy route. The irony is that many people cannot afford to apply to declare bankruptcy.

You can set up a debt management plan yourself for free, or use a debt charity or debt management company to help you. However, if you decide to use a debt management company to help you that company may charge a fee to set the plan up and to manage the monthly payments on your behalf. It is worth checking what the costs will be so you know exactly what you will be paying.

How Long Do They Last?

Bankruptcy usually lasts one year. At the end of that period you will usually be free of debt because any debt that you have not repaid is written off.

There is no set duration for a debt management plan. They tend to last around ten years but it will depend on the level of your debt and how much you can afford to repay each month because with a debt management plan you generally have to repay all of the money that you owe in full.

Another factor to consider is the fact that unlike bankruptcy, under a debt management plan your lenders can continue to charge interest on the amount that you owe. This can mean that it takes even longer to repay your debts under a debt management plan. It can also mean that you pay a much higher total amount over the course of the plan.

Conclusion

If you don’t own your own home and don’t work in a job where having been declared bankrupt could mean that you lose that job, bankruptcy is a relatively quick way to become debt free. However, bankruptcy can have a major impact on your life until you have been discharged from bankruptcy. There are also large up-front fees if you decide to declare yourself bankrupt and if you are struggling to repay your debts it is quite possible you would also struggle to find the money to pay these fees.

If, however, you simply struggling to repay your debts because the monthly repayments are higher than you can afford, a debt management plan is something you should consider. Such a plan will mean that you are repaying your debts for longer and you could well end up paying more than you would have done had you declared yourself bankrupt, but the debt management plan option is a much softer option.

Don’t forget, though, that a debt management plan isn’t simply a case of talking to your lenders to see whether they are prepared to reduce your monthly repayments. Usually your lenders will want to see that you have taken action to reduce your outgoings. This could mean that you need to sell your existing car and replace it with a cheaper version, or take fewer holidays. It is likely that your lifestyle will be affected, and depending on the duration of the debt management plan this could last for a number of years.

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