Oscar Wilde’s humorous claim that a man who pays his bills on time is soon forgotten is probably just as true today as it was in his lifetime. Wilde also stated tongue in cheek that it was only by not paying one’s bills that one could hope to live in the memory of the commercial classes.
Today unfortunately many people are engulfed in a morass of personal debt and cannot see any way out of their financial troubles. They seek a solution to their situation that incorporates a degree of debt forgiveness by their creditors and also hope that that solution will not be a millstone around their necks in terms of their future credit worthiness. In other words they hope that their creditors will formally ‘forget’ about their historic defaults in repaying their debts.
The massive increase in personal indebtedness has led to a corresponding increase in the numbers of insolvent persons looking for ways to address their debts. Most such persons will choose to enter into an Individual Voluntary Arrangements (IVA) or to opt for Bankruptcy (BCY) or will enter a Debt Management Plan (DMP). A crucial factor in either an IVA or BCY is that a portion of the debts are written off i.e. some of the debts are ‘forgiven’.
In an IVA, creditors accept repayment of a portion of the debts and in return agree to forgive the remainder. Typically most IVAs offer a yield to creditors of between 20% and 50% of the debt with the amount being left unpaid and therefore forgiven usually falling between 80% and 50%.
In BCY, even less debt of the total debt is usually repaid and frequently creditors may receive nothing at all from the estate of the bankrupt person after trustee and other fees are paid. In many BCY cases debts are almost totally forgiven although that does not mean that the debtor gets off scot-free. The substantial costs of bankruptcy often totally consume any payments the bankrupt has to make to the trustee. Such BCY payments by the debtor usually consist of an income payments order (IPO) or an income payments agreement (IPA). The difference between an IPA and an IPO is that the IPA is agreed voluntarily between the trustee and the debtor, whereas the trustee obtains an IPO from the court when agreement on the amount to be paid cannot be agreed voluntarily with the debtor. Of course the trustee is also likely to enforce the sale of any assets the debtor may have such as the family home or may alternatively seek to realize any equity in such assets by other means.
In a DMP however, there is usually no debt forgiveness. The DMP lasts as long as it takes for the debtor to repay all of the debts in full. Thus the duration of a DMP can be quite long with some DMPs running to over ten years. The only semblance of debt forgiveness in a DMP is if all or some of the creditors agree to suspend or freeze interest and penalties for the duration of the DMP or for some limited period. Such a suspension or freezing of interest and penalties is by no means guaranteed and when it is agreed, it is provided solely at the discretion of each individual creditor.
While creditors may forgive debts to some extent, particularly when they have little or no alternative choice, they tend not to forget. For example, when you enter into an IVA all unsecured accounts automatically go into default, given that you have ceased to comply with the terms and conditions of the relevant credit agreements. Some of your accounts may already have been in default prior to that time. All defaults are recorded on your credit files which are maintained by credit reference agencies such as Experian and Equifax. Access to and publication of such personal financial data relating to insolvent individuals is not prohibited by the Data Protection Act. The business of the credit reference agencies is to retrieve the data, record it on your credit file and sell it to interested parties who must hold a consumer credit license to be entitled to access the information. The record of such defaults remains on your credit file for six years from the time that the default originally occurred. If you enter into an IVA, default data will not be removed from your credit file for six years, even if you successfully complete your IVA and obtain a Certification of Completion (of your IVA) from your supervisor. The six years ‘clock’ begins ticking from the time the default on each debt is originally recorded.
This is the price you pay for your creditors not forgetting about your debts, long after they have forgiven them, so to speak. In considering any request for credit facilities, whether during the life of your IVA or following its successful completion, creditors will naturally check on your credit history via your credit file. You may be refused credit by some lenders if your credit file still carries records of your defaults. If you are granted credit, you may have to pay premium interest rates. If you were to seek to take out a mortgage for example, any lender willing to lend to you would be likely to seek a higher deposit than if you had a clean credit history and you could be quoted interest rates as much as 6% to 8% greater than high street rates. On the positive side, you will normally find it easier to access credit after completing an IVA than you would if you had just been discharged from bankruptcy.
No matter which solution you pursue to deal with your personal indebtedness, it probably will take less time to get your creditors to forgive some or all of your debts that it will take to get them to forget your defaults and to erase those records from your credit history.