Bankruptcy alternatives

Bankruptcy is a legal process that discharges most debts, but has the disadvantage of making it more difficult for an individual to borrow in the future.

Negotiation is a viable alternative if the debtor has sufficient income, or has assets that can be liquidated so that the proceeds can be applied against the debt.

[1] Debt restructuring is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.

The main costs associated with a business debt restructuring are the time and effort to negotiate with bankers, creditors, vendors and tax authorities.

In addition, the lower interest rate means that more of the debtor's monthly payment is applied against the principal of the loan, resulting in faster debt repayment.

In the UK the individual voluntary arrangement (IVA) represents the main formal alternative to a debtors bankruptcy petition.

The IVA is part of the Insolvency Act 1986 and essentially allows a debtor to reach a formal repayment arrangement with their creditors usually over a 5-year period.