It may be possible to come to an informal arrangement with your creditors that allows you to reduce payments for a period, while you get back on top of your finances. This is called Debt Management.

Start by getting a clear picture of your debts by looking at your credit report. It will give you a snapshot of your current position by showing what you owe, who you owe it to and how well – or badly – you are managing your repayments.

Then make a full list of your debts, remembering to include personal loans and other borrowings that would not otherwise appear on your credit report, such as student loans.

For impartial advice, go to one of the many agencies and charities that specialise in helping people with debts. Try:

• Citizens Advice – www.citizensadvice.org.uk

• The Consumer Credit Counselling Service – www.ccs.co.uk

• National Debtline – www.nationaldebtline.co.uk

Avoid credit repair companies. They have no power to improve your credit rating. Be wary, too, of companies that offer to put you in touch with an insolvency practitioner for a fee. You can contact one yourself, if necessary.

Once you have made your decision, keep checking your credit report regularly. You will inevitably need credit again and it’s important to ensure that your credit history is up to date and accurately reflects your circumstances, as any errors could affect your chances. You may also be able to add a note of explanation, giving some background about the circumstances surrounding your debts. Lenders may take this into account when you apply to them, even after a bankruptcy has been discharged or an IVA has finished.

Known as bankruptcy lite , this is an arrangement between the debtor and his or her creditors to repay a set percentage of the debts over the life of the IVA usually five years. At the end of the period, what remains of the debt is usually written off.

• Can be suggested by a court when you have petitioned for bankruptcy, as an alternative.
• Is set up by an insolvency practitioner, who will be paid a share of the cost of the IVA. This is usually around £3,000, plus VAT, expenses and an administration fee, which you must find. The practitioner will also take a share of your annual repayments.
• Is suitable for those with a relatively high income, since you must find your repayments each month from cash flow.
• Does not usually require that your home is sold creditors are more likely to focus on assets such as savings, endowment policies and premium bonds. It is possible that they will ask you to release some of the equity in your home at the end of the IVA. You are involved in choosing the assets that will go to your creditors.
• Must be agreed to by creditors owed 75 per cent of the debt.
• Is not invariably a way to avoid bankruptcy if you fail to meet repayments, your creditors can then ask for you to be made bankrupt.

• It is a court order that usually frees you from your debts, although you may have to make some contribution towards repaying them.

• It is traditionally used as a way to escape debts that you believe you cannot pay off – and it carries a severe stigma.

• Some debts (student loans and court fines) cannot be included in bankruptcy. These have to be re-paid in full.

• You can apply for (petition) bankruptcy yourself or your creditors (the organisations and individuals to whom you owe money) can approach a court and ask for you to be made bankrupt.

• In England and Wales, you will be freed from your bankruptcy – discharged – after a maximum of 12 months, unless you have failed to co-operate in the proceedings, in which case it can be extended.

• Scottish bankruptcies are called sequestrations and are usually discharged after three years.

• Any money you do not need to live on and any valuable possessions, such as your home or car, can be sold, with the proceeds going to your creditors. Clothes, bedding and basic household equipment, along with anything needed to do your job, are exempt.

• There may be a clause in hire purchase agreements stating that you must return the item if you are made bankrupt.

• If you are a high earner and have money left over after paying living expenses, you may be asked to pay something more towards your debts.

• You have to tell a lender about the bankruptcy if you want to borrow more than £500 during the bankruptcy, which means you are unlikely to be able to borrow at all.

• Even after you have been discharged, you may be refused credit and other financial services, or charged high interest, because lenders can see from your credit report that you have been bankrupt in the past and therefore represent a high risk. Some mortgage lenders ask if you have ever been bankrupt, so the bankruptcy can affect you for the rest of your life.

• Landlords and employers can check your credit report and will see the record of your bankruptcy for at least six years. As a result, you may have problems renting a home or getting the job you want.

• Being an undischarged bankrupt also bars you from certain jobs – for example, as a company director, solicitor, accountant or the army.