‘Write off your debts’, ‘become debt free in months’, ‘little
known government legislation’ – these are all phrases you may have picked up
from advertisements for debt management or debt resolution services, but what
lies behind them? There are a number of
different options available if you find yourself in debt and, depending on your
circumstances, some may be more suitable than others.
Here is a quick rundown of some of the most common.
Debt Management Plans
A debt management plan (DMP) is the name we give to an
agreement between you and your creditors to pay off your debts in instalments,
usually making payments every month. It’s
an informal arrangement and the idea is that you pay your creditors on a
pro-rata basis from the money you have left over after you have taken out your living
costs. This means that you can carry on
making payments without having to use the money you put aside for essential
spending like food and heating.
Creditors will usually agree to a plan if you can present
them with a financial statement that shows your offer of payment is reasonable
and sustainable.
There are commercial companies which offer to provide
this service for you. They will negotiate
with your creditors and take a single payment from you which they should divide
up between your creditors. However, they
will also charge their own fees, which means less money is passed on to
creditors and it takes longer to become debt free. The good news is that there are charities
such as Stepchange and Payplan who will provide this service for free. Alternatively, you can set up a DMP yourself,
perhaps with help and advice from someone like the CAB.
Individual Voluntary
Arrangement
An Individual Voluntary Arrangement (IVA) is a formal agreement
between you and your creditors to pay off your debts over a period of
time. Most types of debt can be
included, but there are exceptions such as court fines and student loans. You will usually need at least £100 spare
income per month in order to qualify, and although there are no maximum or
minimum levels of debt, in reality creditors are unlikely to agree to an IVA
unless your total debt is at least £10,000.
You will need the services of an insolvency practitioner
to set up an IVA and there are fees involved.
Again, there are plenty of companies who can offer this service, but you’d
be wise to speak to your local CAB first to find out whether this is the right
option for you and whether you can get any help.
Bankruptcy
This may be an option for you if you have a large amount
of debt – particularly if your total debt exceeds the value of your assets. At the end of the bankruptcy period your
outstanding debt will be written off, but it can be an extreme measure because
you are likely to use to lose your assets, including your home.
There are also certain restrictions that will apply to you
during the bankruptcy period. For
instance you will not be able to set up and run a company. And if you apply for credit of more than £500
you will have to tell the lender about the bankruptcy.
There are other possible repercussions as well. For instance, it may affect your employment
and it could impact your ability to get credit long after the bankruptcy period
is over.
You will need to find money to pay the court fee and
deposit, and there will be additional fees if you use a solicitor.
Debt Relief Order
If your debts total £15,000 or less, if you don’t own
your own home and your spare income each month is no more than £50, then a Debt
Relief Order (DRO) could be the right option for you. To be eligible your assets will need to total
less than £300 and your car must not be worth more than £1000.
There is a fee of £90 for a DRO (you may be able to get
help with this) and you will need to use an approved intermediary, which you
can find at your local CAB. But at the
end of the DRO period most of your debts will be written off (there are some
debts that are not eligible, such as child support and social fund loans).
Like a bankruptcy, there may also be other implications
for you, and these are factors that you will have to consider when deciding
whether to go down this route.
These are the most commonly used options, but there are others. For example, you may be able to negotiate a
full and final settlement. This is where
a creditor will agree to accept a single, reduced lump sum in settlement of the
debt. They may prefer to do this rather
than recover it in instalments over a longer period. You may even be able to challenge all or part
of the debt – for example, if a product has been miss-sold or a bill has been
calculated wrongly. And if the debt has
not been acknowledged for a certain period (six years in England and Wales,
five in Scotland) your creditors may not be able to take court action to
recover it.
You can find more information about these and other
options at www.adviceguide.org.uk and
your local CAB is there to help you make the right decision and take the most
appropriate action.