Where to find advice if you're struggling with debt
If you are struggling with debt, you should always seek expert advice as there are various options available. Here are some of the main points you’ll need to consider and address.
Debt management plan
A debt management plan (DMP) is an informal arrangement to pay back your debts in regular instalments. It is not legally binding, but it makes it easier to manage your debts because you hand over just one monthly payment, which is split between your creditors.
Cost of a DMP
A DMP is usually set up by a debt management charity or company. Some firms charge a fee, but others (and certainly the charities) offer their services for free, so it’s worth contacting a number of different agencies so that you avoid paying charges.
You can only use a DMP to deal with so-called non-priority debts. such as credit cards, store cards, and bank loans. A DMP cannot help with priority debts such as a mortgage, rent, utility bills or tax arrears.
Individual Voluntary Arrangement
In some circumstances, an individual voluntary arrangement (IVA) is more appropriate than a DMP. An IVA is a legally binding agreement between you and your creditors to repay all or part of your debt in monthly instalments over a fixed time period, usually five years.
It covers only unsecured debts, so its scope is wider than the DMP as it can deal with tax arrears and utility debts. But it cannot include debts secured against property, such as your mortgage, or any hire purchase plans. There are no minimum or maximum debt requirements but most creditors will not agree to an IVA unless you owe at least £10,000 in total.
You must employ an insolvency practitioner to set up an IVA. The costs are funded through your monthly payments into the plan – the practitioner takes its cut before passing on the balance to your creditors (who’ve agreed to accept less money on the basis that they will at least get something).
The fees can be high, sometimes as much as £5,000 or even more, although they adhere to an industry scale of charges. Most practitioner firms take their fee out of the monthly instalments, so you don’t pay separately.
The insolvency practitioner will assess your finances and draw up a payment schedule (including the fee element). It’s important to be aware that an IVA will take into account the value of your home, but you do not normally have to sell the property.
It’s worth noting that an IVA is a heavyweight financial commitment. Many firms offer them as an easy way to write-off substantial proportions of your debt, but they remain onerous, and failure to adhere to the terms can even lead to full-blown bankruptcy.
In other words, they are not a quick-fix solution and they shouldn’t be entered into lightly.
It’s worth noting that an IVA is a heavyweight financial commitment
If you have County Court Judgements (CCJ) against you – and you have two or more debts of less than £5,000 in total – you could apply to the county court for an administration order.
As with an IVA, an administration order is legally binding and allows you to pay off your debts in regular instalments over an agreed period.
The court decides a ‘fair’ monthly amount. It can also agree that you do not have to repay your debts in full – known as a composition order. As long as you stick to the arrangement, your creditors cannot take any further action to recover their money.
The court does not charge an upfront fee for an administration order, but takes 10% of the monthly payment to cover its costs.
If you cannot afford to make any payments towards your debts, you could ask your creditors to simply write off the outstanding amount. Of course, they will only agree in exceptional circumstances, perhaps if you are ill or on a very low income.
Debt relief order
Alternatively, you could apply for a debt relief order (DRO). They are only available in England and Wales and can be a cheaper alternative to bankruptcy. However, there are strict criteria. Your total debts must be worth less than £15,000 and you must have a low income. In addition, you cannot have savings of more than £300 or a car worth more than £1,000.
You must apply for a DRO through an approved intermediary, usually a debt charity or adviser. The cost is £90, but it can be paid in instalments over six months.
A debt relief order lasts for a year, during which time you make no payments towards the debts listed on the order. At the end of the 12 months, the debts are written off.
However, a DRO could affect your access to future credit as it remains on your credit file for six years.
Bankruptcy is the final option and involves a court order. An official receiver then takes charge of your money and assets, which could be sold to pay off your creditors. However, any unpaid debts are usually written off and you can often make a fresh start after just one year.
Bankruptcy is the only solution for some people, but it is not to be taken lightly as it could affect your job and your access to future credit.
The system is slightly different in Scotland. If you have enough money, you can repay your debts through the Scottish government’s debt arrangement scheme (DAS).
The DAS must be set up by an approved adviser. You then pay back the money you owe in instalments over a reasonable time period. The creditors cannot chase you for the cash once a DAS is in place. All charges and interest are also frozen.
You must pay back all the debts listed in the DAS and fees will be deducted from the monthly payments, up to a maximum of 10%. Your creditors are therefore guaranteed to get back at least 90% of their money.
A trust deed is the Scottish equivalent of an IVA, although there are some differences. The maximum term is usually 48 months and you must have debts of at least £5,000 to qualify. When the four years are up, any remaining debts are usually written off.
If you don’t have the funds to pay off your debts, you can contact your creditors and ask that they be written off. Or, you can apply for bankruptcy, known as sequestration in Scotland. The process is similar to bankruptcy proceedings in England, with similar pros and cons.
People who live in Scotland can also take the LILA route to bankruptcy. A LILA bankruptcy is dealt with by the Accountant in Bankruptcy and, if approved, your debts are written off. It usually lasts a year and costs £200.
LILA stands for low income, low assets and applies to people who earn equivalent to or less than the standard national minimum wage for a 40 hour working week, currently £247.60 a week.
Low assets are defined as worth less than £10, 000 with no single asset worth more than £1,000. Homeowners do not qualify.