Which Debt Management Solution Is Best For You?
With consumer debt levels reaching record proportions, more and more people are seeking help from debt management professionals.
However, there is a wealth of information on the internet some, of which can be quite baffling and or inaccurate. This can cause confusion and add even more stress to what is already a very worrying situation for people.
In many cases people will simply be frozen by fear of the unknown, or be afraid to admit they have a problem and therefore not act at all until it is too late.
The bottom line is that no matter how big or small your problem is there is a solution out there for you. The most important thing to remember though is that the problem will not go away unless you do something about it.
So what is the best solution for you?
Well this will depend on any number of factors, such as how much money you owe, the number of companies you owe it to (creditors), the type of debt (secured or unsecured), and how much disposable income you have. Disposable income is the amount of money you have left each month after all of your normal household bills have been paid.
A summary of the potential solutions is below.
Debt Management Plan (DMP)
This is an informal arrangement with your creditors, which is normally negotiated by a debt management professional.
With a DMP you agree an amount to pay each month, based on your disposable income. This money is then paid to a debt management company, who will share that amount out among your creditors. This means you have one payment to make each month, making budgeting a lot easier.
The debt management company will also try and agree to freeze any interest so that the debt does not become any larger.
The downside to this type of agreement is that it is informal and therefore the creditors may still write to you to chase you for the debt, and may cancel the agreement at any time.
However, if you believe that things will pick up for you financially in the near future then this might be a good interim solution. When things do get better you can increase your monthly payments until the debt is cleared.
A debt management plan will affect your credit rating, but presumably if you are considering entering into such an agreement then you are already missing payments, and this is damaging your credit rating anyway. This way you will have a little more control and hopefully a little more sleep!
Debt Relief Order (DRO)
A Debt Relief Order is a formal order, which can be applied for online, and issued by the Official Receiver without the need to apply to the court.
To qualify you must have unsecured debts of under 15000, have assets of under 300, and have a disposable income of less than 50 per month. You will be able to own a car providing the value is less than 1000.
You must also have been resident in England or Wales for 3 years.
The benefits from a DRO over a DMP is that because it is a formal order, your creditors cannot chase you for payment without first applying to the court, and at the end of 12 months, the debt is written off.
Should your circumstances change during the 12 months (an inheritance or lottery win maybe!), then you are obliged to inform the Official Receiver. Failure to co-operate fully will see you placed under restrictions for up to 15 years. However, providing you are honest and upfront from the outset, you have nothing to worry about.
The other thing to keep in mind is that there is a cost of 90 to set up a DRO, so you will need to find that cash from somewhere.
The DRO will be recorded on your credit file as well so may affect your ability to obtain credit for up to 6 years after. However, as mentioned above, this will be no worse than continually defaulting on payments and the endless sleepless nights, it just means you will need to learn to save for things rather than borrow.
Individual Voluntary Arrangements (IVAs)
An IVA is a much more formal arrangement, which is negotiated on your behalf by an Insolvency Practitioner.
As assessment is made of the amount you can afford to pay each month, after normal living expenses have been taken into account, in the same way as for a DMP. If the amount you can afford to pay is acceptable to your creditors, then you agree to pay that amount each month for 5 years. At the end of the 5 year period any remaining debt is wiped out leaving you debt free.
There are some basic criteria you need to meet to qualify for an IVA.
- You must owe a minimum of 15000
- The debt must be spread across at least 4 different creditors e.g. if you have an overdraft and a loan with the same bank and 2 different credit cards this is 4 debts but only 3 creditors so you would not qualify
- At least 75% of the creditors by value must accept the offer. For example, if you owe 25000 across 4 credit cards, 10000 to one, 9000 to another with the remaining 6000 spread across the other 2, the two largest creditors would have to agree. If either rejects the offer as being too low then there will be no agreement. On the other side of the coin if they both agree then the remaining two creditors have no choice.
You must declare any change of circumstances over the 5 year period, and will be asked to show payslips on a regular basis. The intention is not to leave you with no money, but to ensure that you pay back as much as is feasible, without leaving you destitute.
An IVA will remain on your credit file for 6 years, but as mentioned before, a completed IVA will be looked upon more favourably than a large debt with a number of outstanding defaults and CCJs etc.
Bankruptcy
The final solution is to file for your own bankruptcy. This is the solution with the biggest stigma and one which people tend to try and avoid at all costs, but in some cases it is the best way out.
Basically with bankruptcy your debts are all written off from the moment the bankruptcy order is made. This means your creditors can no longer chase you for outstanding debt, and once they have been made aware of the order it is actually an offence for them to do so.
You will be under certain restrictions until you are discharged from bankruptcy e.g. you cannot borrow more than 500 without declaring you are bankrupt and you cannot be director of a business.
When should you consider bankruptcy?
Well if you do not have enough disposable income to agree an IVA or the creditors are refusing to accept an offer you have made, then bankruptcy might be your only option.
If you have entered into an IVA and a sudden change of circumstance such as losing your job means you can no longer make the payments then again bankruptcy might be your only option.
There is a cost to bankruptcy of 600, (150 for the court and 450 to the administrator) although the court fee can be waived if you are on income support. The fees are payable on the day and in cash, as your bank account will be frozen from the time that the order is signed by the judge. (You will need to open a new bank account, which will have restrictions, such as no cheque book, no internet banking and of course no overdraft).
Common Misconceptions
You will not be discharged from bankruptcy for 5 years.
False - other than in exceptional circumstances you will be discharged from bankruptcy after 12 months.
You will lose your home if you are declared bankrupt
False - First of all if you continue to pay your mortgage on time even after you have been made bankrupt, then the mortgage company will have no interest in repossessing your home. Therefore if you are struggling at the moment, the one bill you should always pay first is your mortgage.
The Trustee in charge of your bankruptcy will register an interest in your property. This means should you sell it they will take any profit to share among your creditors. However, it is unlikely that th
However, there is a wealth of information on the internet some, of which can be quite baffling and or inaccurate. This can cause confusion and add even more stress to what is already a very worrying situation for people.
In many cases people will simply be frozen by fear of the unknown, or be afraid to admit they have a problem and therefore not act at all until it is too late.
The bottom line is that no matter how big or small your problem is there is a solution out there for you. The most important thing to remember though is that the problem will not go away unless you do something about it.
So what is the best solution for you?
Well this will depend on any number of factors, such as how much money you owe, the number of companies you owe it to (creditors), the type of debt (secured or unsecured), and how much disposable income you have. Disposable income is the amount of money you have left each month after all of your normal household bills have been paid.
A summary of the potential solutions is below.
Debt Management Plan (DMP)
This is an informal arrangement with your creditors, which is normally negotiated by a debt management professional.
With a DMP you agree an amount to pay each month, based on your disposable income. This money is then paid to a debt management company, who will share that amount out among your creditors. This means you have one payment to make each month, making budgeting a lot easier.
The debt management company will also try and agree to freeze any interest so that the debt does not become any larger.
The downside to this type of agreement is that it is informal and therefore the creditors may still write to you to chase you for the debt, and may cancel the agreement at any time.
However, if you believe that things will pick up for you financially in the near future then this might be a good interim solution. When things do get better you can increase your monthly payments until the debt is cleared.
A debt management plan will affect your credit rating, but presumably if you are considering entering into such an agreement then you are already missing payments, and this is damaging your credit rating anyway. This way you will have a little more control and hopefully a little more sleep!
Debt Relief Order (DRO)
A Debt Relief Order is a formal order, which can be applied for online, and issued by the Official Receiver without the need to apply to the court.
To qualify you must have unsecured debts of under 15000, have assets of under 300, and have a disposable income of less than 50 per month. You will be able to own a car providing the value is less than 1000.
You must also have been resident in England or Wales for 3 years.
The benefits from a DRO over a DMP is that because it is a formal order, your creditors cannot chase you for payment without first applying to the court, and at the end of 12 months, the debt is written off.
Should your circumstances change during the 12 months (an inheritance or lottery win maybe!), then you are obliged to inform the Official Receiver. Failure to co-operate fully will see you placed under restrictions for up to 15 years. However, providing you are honest and upfront from the outset, you have nothing to worry about.
The other thing to keep in mind is that there is a cost of 90 to set up a DRO, so you will need to find that cash from somewhere.
The DRO will be recorded on your credit file as well so may affect your ability to obtain credit for up to 6 years after. However, as mentioned above, this will be no worse than continually defaulting on payments and the endless sleepless nights, it just means you will need to learn to save for things rather than borrow.
Individual Voluntary Arrangements (IVAs)
An IVA is a much more formal arrangement, which is negotiated on your behalf by an Insolvency Practitioner.
As assessment is made of the amount you can afford to pay each month, after normal living expenses have been taken into account, in the same way as for a DMP. If the amount you can afford to pay is acceptable to your creditors, then you agree to pay that amount each month for 5 years. At the end of the 5 year period any remaining debt is wiped out leaving you debt free.
There are some basic criteria you need to meet to qualify for an IVA.
- You must owe a minimum of 15000
- The debt must be spread across at least 4 different creditors e.g. if you have an overdraft and a loan with the same bank and 2 different credit cards this is 4 debts but only 3 creditors so you would not qualify
- At least 75% of the creditors by value must accept the offer. For example, if you owe 25000 across 4 credit cards, 10000 to one, 9000 to another with the remaining 6000 spread across the other 2, the two largest creditors would have to agree. If either rejects the offer as being too low then there will be no agreement. On the other side of the coin if they both agree then the remaining two creditors have no choice.
You must declare any change of circumstances over the 5 year period, and will be asked to show payslips on a regular basis. The intention is not to leave you with no money, but to ensure that you pay back as much as is feasible, without leaving you destitute.
An IVA will remain on your credit file for 6 years, but as mentioned before, a completed IVA will be looked upon more favourably than a large debt with a number of outstanding defaults and CCJs etc.
Bankruptcy
The final solution is to file for your own bankruptcy. This is the solution with the biggest stigma and one which people tend to try and avoid at all costs, but in some cases it is the best way out.
Basically with bankruptcy your debts are all written off from the moment the bankruptcy order is made. This means your creditors can no longer chase you for outstanding debt, and once they have been made aware of the order it is actually an offence for them to do so.
You will be under certain restrictions until you are discharged from bankruptcy e.g. you cannot borrow more than 500 without declaring you are bankrupt and you cannot be director of a business.
When should you consider bankruptcy?
Well if you do not have enough disposable income to agree an IVA or the creditors are refusing to accept an offer you have made, then bankruptcy might be your only option.
If you have entered into an IVA and a sudden change of circumstance such as losing your job means you can no longer make the payments then again bankruptcy might be your only option.
There is a cost to bankruptcy of 600, (150 for the court and 450 to the administrator) although the court fee can be waived if you are on income support. The fees are payable on the day and in cash, as your bank account will be frozen from the time that the order is signed by the judge. (You will need to open a new bank account, which will have restrictions, such as no cheque book, no internet banking and of course no overdraft).
Common Misconceptions
You will not be discharged from bankruptcy for 5 years.
False - other than in exceptional circumstances you will be discharged from bankruptcy after 12 months.
You will lose your home if you are declared bankrupt
False - First of all if you continue to pay your mortgage on time even after you have been made bankrupt, then the mortgage company will have no interest in repossessing your home. Therefore if you are struggling at the moment, the one bill you should always pay first is your mortgage.
The Trustee in charge of your bankruptcy will register an interest in your property. This means should you sell it they will take any profit to share among your creditors. However, it is unlikely that th