Brits bankruptcy short cut very popular these days.

Twenty years ago Britain passed a law that allowed small businesses and individuals to avoid bankruptcy if they are willing to pay a percentage of their debt off over time. These are called Individual Voluntary Arrangements and they work like this:

The debtor offers to pay all creditors some percentage of the debt owed (usually 25%) over five years and if creditors accounting for 75% of the debt agree, the others must go along.

This is supposed to be less of a stigma than bankruptcy and easier to execute. These plans appear to be a better deal than so-called debt management plans that are popular here in the United States. DMP’s usually require payment of most of the debt, although interest and late fees are often eliminated.

However, if we compare the British plans to the United States’ Chapter 13, they don’t look so good. First, there is very little stigma to Chapter 13’s these days. Lenders have become much less averse to working with borrowers that have filed bankruptcy. In fact your credit standing might go up if you eliminate outstanding claims with a bankruptcy filing.

Also, typical payments under Chapter 13 are only 10% to 15% of the debt.

I do not know how bankruptcy works in Britain but the Wall Street Journal reports that these Voluntary Arrangements have become very popular, with four times as many filings this year as in 2004. Average debt is about 40,000 pounds (around $60,000).

For more information on bankruptcy, click here.

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