Should I File Bankruptcy Or Is Debt Settlement A Better Alternative?

When personal debt reaches the kind of level where you just cannot see how you could ever be debt free again, many people think that bankruptcy is their only option.  While bankruptcy is a way of ending a very serious debt situation in a relatively short period of time, it is an extremely serious step to take, with drastic and long lasting consequences.  These include losing control over all your assets and possibly losing your home, having your bankruptcy publicised in the press, difficulty getting credit or even opening a bank account and not being allowed to work in certain professions.

For most serious debt situations, bankruptcy is not the only option, and consideration should at least be given to the alternatives before deciding to file for bankruptcy.  In the US, the most common solution used as an alternative to bankruptcy is debt settlement.  In the UK the main alternative is what is known as an IVA.  I shall explain how these work, but they are both ways of eliminating very serious debts without the lasting consequences of bankruptcy.

Debt settlement has had some bad press recently, but only because of a small number of unscrupulous companies.  It is an area of work where vulnerable people can be exploited, and this has proven too hard to resist for some organisations.  However, there are plenty of reputable and reliable companies too, and when debt settlement is done effectively it can wipe out more than half of your debt, making it possible to repay the rest.

The process of debt settlement is one in which a skilled debt negotiator approaches all your creditors with view to agreeing deals to settle your debts for much less than their full value.  The incentive for the creditor to settle is that the remaining amount can be paid back all at once or very soon.  Getting huge discounts is not easy and not a matter of luck.  The debt settlement companies understand the processes that each creditor goes through and they know how to time their approaches just right to maximise discounts.

While your negotiator is working away at your creditors, you will have stopped paying them any money and will be putting it away in a new account instead.  This is saved up and used to pay creditors when settlements are made.  The time is takes to reach agreement can vary enormously, depending on many factors, but the settlement process will typically take between two and four years.

In the UK, debt settlement is not offered as a service in the same way as it is in the US, because there is a government scheme called an individual voluntary arrangement (IVA), which achieves the same result.  With an IVA you make payments of an agreed amount, which goes towards your unpaid debts, but after a set period of usually five years, your remaining debts are written off.  This scheme was specifically set up as an alternative to bankruptcy, and is a very effective way of ending a serious debt situation without the consequences of bankruptcy.

If you approach a good debt settlement or IVA company, they will give you straight advice and tell you if you would be better off just filing for bankruptcy.  If your situation is that serious, then you should at least approach a specialist company and see whether they can offer you an alternative solution or not.  You must be careful to ensure you only approach reputable companies that will give you honest advice though, otherwise you may end following a course of action that leaves you with even more debt.

Unless you are prepared to undertake a lot of research yourself, the easiest way to narrow down your search is to follow recommendations for companies that are known to be reputable and well established.  If you start with a list of companies that have a long history of having already sorted out the debt problems of many people, you can approach perhaps three of them and make a comparison between their suggestions and recommendations.  The application process will give you a feel for each one and you can go with whichever you feel confident about.