Is debt consolidation an alternative to bankruptcy?
Bankruptcy should always be viewed as a last alternative.
With other less extreme options often available, it’s important to ensure that you have all the relevant information before making a decision.
We discuss the option of consolidating debts to get lower monthly payment as a potential way of avoiding bankruptcy
Bankruptcy is not an easy route
There are urban myths where you ‘go bankrupt to just wipe out all your debts’, therefore implying that it is an easy option compared to paying your debts or other solutions. Though the disadvantages of bankruptcy can include:
- High levels of stress – going through the bankruptcy process – form filling, attending Court, etc.
- A long term impact on your finances – for example, the inability to get credit for many years, etc.
- Your assets sold to pay off debts – If you own assets such as your own home, or other valuable goods such as cars and jewelry, this could be sold to pay off debts
Debt consolidation as a possible alternative to bankruptcy
To find out more see
- Citizens Advice bankruptcy advice guide
- Money Advice Service’s guide on options for writing off your debt
- Contact the National Debtline for bankruptcy advice
- Read shelter.org.uk’s article on other alternatives to bankruptcy
5 Steps to Lowering Monthly Loan Repayments
One alternative to bankruptcy if you have high-cost loans is to consolidate those debts into a cheaper loan and reduce your monthly outgoings. The following suggests the steps you should take if you are considering a debt consolidation loan and have a poor credit history
- Step 1 – Calculate the total outstanding balances on all your loans
Before you can consider debt consolidation you need to establish exactly how much you need to borrow. To find all of your latest loan statements and add up the total amount you need to pay off that loan. Please note that some lenders add charges when a loan is paid off, so to get an accurate figure we suggest you ring up your lenders and get from them the total amount you would need to clear 100% of your balance and shut down the account.
- Step 2 – Calculate the amount you are paying per month
You also need to add up all you are spending per month on your loans, this should be fairly simple just look at your latest bank statements and add all these up.
- Step 3 – Calculate what you could actually afford per month
There is no point in taking out a debt consolidation loan if you still cannot comfortably afford this repayment. So please look through all your income and expenses, and with the help of the Citizens Advice budget planner, assess how much you could comfortably afford to pay per month for a debt consolidation loan.
- Step 4 – Calculate how much you can afford to borrow
Now that you know what you can afford to pay per month use our Loan Calculator and you can now calculate the size of the loan that you could take out.
- Step 5 – Select a suitable loan
Now that you know how much you can afford, you need to start the process of finding a suitable loan. We offer you two options for doing this
How a cheaper loan can help some avoid bankruptcy!
In many cases getting out another loan cannot help, but in a select few cases, this may be the solution, see the example below. John has a poor credit file and needed to borrow money to help buy equipment for his business, he took out three loans:
|Total Loans:||£2,750||Cost Per Month:||£868.81|
- As you can see, for £2750 borrowed, this was costing John £868.81 per month.
- John then had a slow down at work at could not make these repayments any longer.
One solution for John is to consolidate all these debts into a guarantor loan to lower his monthly repayments, the following is an example**:
- Borrowing £2,750 over 60 months
- Interest rate 49.9 %
- Repaying £108.69 per month, total repayable £6521.40
- This, therefore, saves John £868.81 – £108.69 = £760 per month!
- In this example, John could comfortably afford £108.69 a month.
So in this particular case, taking out another loan to reduce your overall monthly repayments to an amount you can afford, could be an effective way of avoiding bankruptcy.
** Please note that the above figures are for illustrative purposes only.