Being in Debt can be very worrying and stressful, many people find themselves financially stretched at times this could be due to unemployment, taking on too much credit or other changes in circumstances such as a divorce. The key thing when in debt is to look at all the solutions available to you and decide which is the best option based on your circumstances, always seek advice from a professional. If you own your home you may have equity in your property then consider equity release, or if your debts are less than £15,000 and you don’t own a property then you may consider a Debt Relief Order. There are many options available to you most of them are explained below.
If you are regularly missing payments or paying late on unsecured debts, and a large percentage of your monthly income is being spent on debts such as credit cards then a DMP might help to relieve the pressure.
Typically DMPs are set up and run by a specialist debt management company who will look at your income and outgoings. They are able to assess how much you can realistically afford to pay once your normal living expenses have been covered. The company will then contact your creditors on your behalf and try and negotiate a reduced payment as well as freezing any interest, preventing the debt from getting any bigger.
Once an agreement has been made, you make one monthly payment to the debt management company and they will share this as agreed among your creditors.
Your creditors are not legally obliged to accept an offer from the debt management company and may continue to write to you to chase payment in the normal manner. They can also decide at any time that they are no longer happy with the arrangement and cancel it.
Creditors tend to agree to these arrangements on the basis that it is better to get some of their money back than none at all, which could happen should you be declared bankrupt for example.
Not all debts are eligible for a DMP, for example hire purchase loans or secured loans.
The first step to relieving the pressure is to face up to the situation and speak to a professional.
A debt management plan will in itself not damage your credit rating. If you are considering a DMP or in a DMP then the chances are that your credit rating has already been damaged. The DMP will simply help relieve some of the pressure from the creditors - any defaults or court action will still be recorded on your credit file.
Debt relief orders are formal agreements for people who have few assets, very little disposable income and have a total debt of less than £15,000.
To get a DRO you need to seek professional advice and if the advisor believes it to be appropriate, an application will need to be made. The form may be completed by either the advisor themselves or an intermediary.
An applicant must:
An IVA is a more formal agreement than a DMP and is negotiated on your behalf by an insolvency practitioner. An assessment will be made of your income and essential living expenses in the same way as for a DMP and an offer will be proposed to your unsecured creditors comprising a set amount per month.
The IVA will last for 5 years, and at the end of that term the remaining debt is wiped out, giving you a fresh start.
During the IVA you will need to declare any change in circumstances e.g. a pay rise or inheritance, as a proportion of this may also be taken for your creditors.
A meeting of all the creditors is held and providing that at least 75% of the creditors by value accept the terms, then the remaining creditors have to agree as well. For example, if you owe £20000 across 5 credit cards, and 2 of these credit card debts total £15000 and the remaining £5000 is spread across the other 3, then if the 2 biggest accept the terms the others have no choice.
An IVA will be recorded on your credit file, however, a completed IVA will be considered more favourably than numerous delinquencies, defaults and CCJs.
There are advantages and disadvantages to all debt management solutions. The best solution for you will depend on your own particular circumstances, which is why you need to speak to a professional before taking any action. Complete our simple debt management application form and one of our partners will call you for a confidential chat.
An IVA will generally last for 5 years, but the debtor can, at any time, offer a full and final settlement and complete it earlier. Bankrupts are normally discharged after 1 year and occasionally before, if they are eligible. An income payments order as part of a bankruptcy will last for a maximum of three years and payments are generally much lower than those made as part of an IVA.
Both an IVA and a bankruptcy will last on the debtor's credit file for 6 years.
As an undischarged bankrupt, you may not apply for credit of more than £250 without disclosing your status. If you are in an IVA, there is no statutory requirement to prevent you from applying for credit, although it is highly likely that this will be one of the terms of the agreement.
The chances are that if you are considering an IVA or bankruptcy then your credit rating has already been severely damaged. Completing an IVA will show some commitment to paying off debt, but will not necessarily be seen more favourably than being a discharged bankrupt. In both cases, you will be in a better position than if you had continued to register defaults, delinquencies and CCJs. The moment you come out of the bankruptcy or an IVA you will be debt free.
The main advantage of an IVA or bankruptcy over a debt management plan is that all unsecured creditors are bound by it once it has been agreed and will have to stop writing to you and calling you for payment. In the case of an IVA, even if a creditor fails to turn up to the creditors meeting, or votes against it, if the agreement is passed, they are bound by it. The creditors will then claim their share of any payment from the IVA supervisor (who will be paid by the debtor) and not from the debtor directly.
Insolvency practitioners are licensed and are the only people permitted to administer an IVA. The insolvency practitioner's role changes at each stage of the IVA process.
The role of the advisor is to look at the debtor's individual circumstances and discuss all of the potential solutions. These may not necessarily be an IVA, but could be a debt relief order, a DMP, debt consolidation or a re-mortgage. The advisor does not have to be an insolvency practitioner but often is.
If an IVA is deemed to be the best solution then an insolvency practitioner will become the Nominee. The role of the Nominee is to review the IVA proposal and report on it. This is generally a standard document which will be tailored for the individual's circumstances.
The type of information collected includes, full details of income and expenditure in order to calculate the debtors disposable income, details on how the debtor got into financial trouble, and details of any assets.
There will also be details on how to call further creditor's meetings should the debtor's circumstances change significantly. Any increase in disposable income has to be reported and the amount paid into the IVA increases proportionally. The supervisor will not take all of the increase as this would potentially discourage the debtor from attempting to earn more, and thus be detrimental to the creditors.
The chairman?s role is to hold the meeting of creditors and negotiate an agreement between them and the debtor. Creditors will nearly always ask for amendments such as specifying a minimum return e.g. 40p in the pound, placing restrictions on obtaining further credit, and insisting that the supervisor petitions for the debtor's bankruptcy should the debtor miss a certain number of payments.
If the IVA is approved, the insolvency practitioner then becomes the IVA supervisor. Their main duty is to ensure that the terms of the IVA are met, collecting monthly payments from the debtor and paying the creditors, providing the court and the creditors with an annual report and periodically checking bank statements and wage slips. The debtor is required to comply with any such requests.
In Scotland they have a similar process to an IVA, known as a Protected Trust Deed (PTD). This works in a similar way to an IVA, the main difference being it only lasts for three years instead of five. Again, this acts as an alternative to bankruptcy which in Scotland is known as sequestration.
Bankruptcy is one way of writing off all of the debts you cannot pay, enabling you to make a new start, although there will be certain restrictions placed upon you.
You can either petition for your own bankruptcy, or any creditor to whom you owe more than £750 and petition to make you bankrupt.
Even if you refuse to acknowledge the proceedings or disagree with them, the court can still make a bankruptcy order against you. Therefore if a creditor has filed the petition, you are better off trying to negotiate a settlement or find an alternative solution rather than ignoring it. It is difficult and expensive to try and get a bankruptcy order annulled once it has been made.
Details of bankrupts are published in the London Gazette and on the Personal Insolvency register but are no longer published locally unless you have been dishonest in your petition or there have been complaints in the local community about your conduct.
An Official Receiver will be responsible for administering your bankruptcy, interviewing you either in person or over the telephone and investigating the reasons for bankruptcy, to ascertain if you have been in anyway dishonest or to blame for the situation. The Official Receiver will enquire with your bank and building societies, mortgage company, pension and insurance companies and provide your creditors with a report. A copy of the report will also be provided to the court if deemed appropriate.
An IVA is an alternative to bankruptcy. However, it is possible to move from one to the other. Should you be declared bankrupt, and then find that a change in circumstances such as a new job increases your income and therefore an IVA becomes viable, you can apply to the court to have your bankruptcy annulled and move into an IVA. This can only happen if your bankruptcy has not been discharged.
Also, should you miss one or more payments of an IVA , your creditors may well petition to have you made bankrupt. Likewise, if a change in circumstances such as losing your job means you will no longer be able to meet the IVA payments you could petition to have yourself made bankrupt.
If you have mortgage arrears from a previous property in some circumstances these can be included in your IVA. If you have a mortgage on the property you live in, this cannot be included as part of the IVA. However, every case has to be looked at in its own right and an IVA can help prevent home repossession.
In cases of bankruptcy, the Official Receiver will register beneficial interest, so should the property be sold, they can stake a claim for any money left over from the sale. This money would then be shared amongst the creditors. Over time if the value of the property rises, the benefit of any increase will go to the Official Receiver.
The beneficial interest does not get automatically returned to the bankrupt upon discharge, however it can be bought at any time by a partner or friend or even by the bankrupt themself.
On all cases should you fail to keep up payments your home could be repossessed by the mortgage company.
There is stigma about being in debt. Many people are afraid to talk about it or worried that their friends and neighbours might find out about their circumstances. However, the only way to relieve the stress and the pressure is to deal with the problem by talking to a professional. The problem will not go away unless you do, and in all cases, people feel better for having taken action no matter how daunting it might feel.
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