Money guide

10 ways to avoid bankruptcy

Article updated 18 May 2009

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If you are struggling to keep on top of you debts, then bankruptcy could be a real fear for you. We bring you some top tips on how to avoid it…

Even if you are currently able to meet your repayments, factors outside your control such as an oil crisis, a serious terrorist attack or recession in the US could affect your funds by sky rocketing interest rates. So follow our ten tips and future-proof your finances.

1. Give yourself a safety net

Think about the worst thing that could happen to you financially - if you lost your job or became too ill to work, how long would you be able to live off your savings?

Work out the following costs:

Payments to credit cards
Loan repayments
Mortgage / rent payments
Food
Utilities
Essential transport

You should aim to have enough saved up to cover three to six months of payments and should prioritise costs based on their importance to your survival. For example, you need somewhere to live, but do you really need a car?

If you don’t have any savings at all it may look like you have a huge mountain to climb but it’s better to start sooner rather than later. Even small amounts are better than nothing, and you’ll be surprised how quickly it adds up.

Now is a good time to open a high interest savings account – there are a range of them available so check out our savings best buy table to compare and find the best one for you. You could also set up a standing order into your savings account, and soon you won’t even notice the money leaving your current account each month.

2. Career management

Think about the sector that you work in - will work, and pay, be regular and reliable?

If you’re self employed, or work in an industry where you might not always be employed, such as in the acting industry, you need to plan for the times when money might be short. Consider the risks of going into an industry that’s seasonal or that could be badly affected by a recession – such as being an estate agent or selling double glazing.

Don’t let this put you off your chosen career, but just be aware of the risks and prepare accordingly.

3. Fix your mortgage

While the Bank of England base rate is currently at a record low of 0.5%, it will have to rise at some point.

Every increase made means that if you have a variable mortgage, your interest payments will be going up.

However, it is possible to fix your mortgage at a set rate for a certain amount of time, protecting you from further hikes. This can be anything up to 10 years, though standard deals last around three to five years.

Many of these more flexible deals have chunky admin costs that can be off-putting, but think of the peace of mind. Also, while it could cost you money to fix your mortgage, if you can do so for five years or longer, you will probably save money in the long run. Use our mortgage calculator to compare your current mortgage with a fixed one.

Most importantly when making any decisions like this, get advice.

Compare mortgages

4. Payment holidays

You can also get mortgage deals that allow you to take payment holidays. This means that you can take a break from your monthly payments, usually of up to 12 months, if need be. But taking a holiday will mean that you will be paying your mortgage back for longer. This can be counteracted by making over-payments (again depending on the mortgage type you have).

Even if you’re not planning on taking a payment holiday, overpaying when you can afford it can reduce the amount you pay in interest. For example, overpaying by £75 a month on an £80,000 Nationwide repayment mortgage with an original term of 25 years can save you £20,000 and shave six years off your mortgage term.

You should always read the small print and look for any clauses that could mean you end up incurring fees if you move house or want to pay your mortgage off early.

5. Don’t overstretch yourself

Before committing to costly goods such as electrical items or a new car, think seriously about whether you really need them or not. If you do, make sure that you shop around – buy a second hand car instead of a brand new one and purchase electrical goods online where they will be cheaper.

Don’t get sucked into getting store credit as the interest rates will be even higher than those of a credit card. Also, before taking dealership credit for a car check to ensure that you’re getting the best deal on an unsecured loan. And as with all types of credit, it’s good to check if you will have a fixed rate or not.

6. Fix your utility bills

Like mortgages, there are now a range of fixed-price utility deals on the market, having been launched to counteract the negative publicity over recent price rises.

Getting one of these may be slightly more expensive than a standard deal, but it protects you from any future price hikes.

Compare gas and electricity providers

Compare broadband deals

7. Cap your phone bill

Many providers offer unlimited UK landline calls for a fixed amount, and in times of particularly tight belts, you can block outgoing calls, restricting your bill to line rental only.

Compare home phone providers

8. Insure your debts against unemployment and sickness

According to the Income Protection Task Force and consumer watchdog Which?, the best option for providing financial peace of mind is Income Protection, an insurance product which provides a regular monthly income to people who become unable to work.

More popular however is Payment Protection Insurance (PPI). But the Financial Services Authority (FSA) has identified that there has been widespread miss-selling of this service.

Many loan providers only make their money on keenly priced loan deals via the insurance and so some lenders mislead their customers into thinking that the insurance will enhance their application.

This practice has now been referred to the Competition Commission and the FSA has fined Loans.co.uk £455,000 for miss-selling PPI to 14,400 customers.

PPI is optional with loans and can usually be bought elsewhere for a much lower price. Despite its bad press, it should be noted that if correctly sold, PPI can provide a valid method of protecting you against a change in circumstances.

It’s a good idea to visit a specialised broker or talk to an independent financial advisor before insuring your debts, and read the details of the policy, looking for any exclusions as some companies make it almost impossible to claim.

Finally, think about your personal circumstances and the sector you work in. Is your job secure? How transferable would your skills be if you lost your job? Think about how likely you might be to need this type of insurance.

9. Budget

While it might seem obvious, writing up a good budget – and sticking to it – is essential when you’re facing hard times. Writing up a budget will highlight any wastage and force you to confront your spending habits.

A budget will also let you regain control of your finances, giving you the confidence to make savings or move towards getting out of debt.

For more advice on writing a budget or getting out of debt get in touch with the Consumer Credit Counselling Service (CCCS) or Citizens Advice (CAB).

10. Don’t hide from your debts

If you do get to the point where you are in arrears, or are facing CCJs and bailiffs, don’t ignore the problem. Doing so will only get you into more trouble. Get legal financial advice and make sure that any extenuating circumstances are explained. Resist the temptation to borrow more money to pay of agitated debtors as this will only make matters worse.

Get in touch with the Government’s Insolvency Service or with the CCCS or CAB for help and advice.