Many people today have personal money worries. Most people want to do something about them, ideally to make them go away. There are various solutions to issues of personal insolvency out there. The problem is when and where to begin. We would like to know how serious our problems are and rate our situation on a scale of one to ten. A rating of one would be a state of being affluent and comfortable with ten being in a state of ‘hopeless’ personal insolvency. Except of course that there is always hope!
Particularly in the UK where enlightened legislation and the ‘fresh start’ approach to debt provides more than just hope. There are attractive alternative strategies that the financially burdened citizen can pursue, regardless of the severity of personal insolvency.
The four principal options or approaches when facing a personal debt crisis are Debt Consolidation, Debt Management, Individual Voluntary Arrangement and Bankruptcy. The first two of these options, Debt Consolidation and Debt Management, would normally be availed of by people who, strictly speaking, are not technically insolvent but may have considerable difficulty in managing their finances. On the scale of one to ten, their problems would rate as a six or less. The second two options are for people who are clearly insolvent with problems at the upper end of the scale ranging from about five to ten. Each approach has its advantages and disadvantages. It makes sense to consider them all before deciding which of them to employ. It also makes sense to take advice from one of the charity debt advice bodies such as the StepChange or from one or more of the commercial insolvency advice firms before making a final decision. Let’s look at each option briefly in turn.
Debt Consolidation
Debt consolidation involves getting a new loan which you use to immediately clear all other unsecured debts. As a result, you only have to make one regular monthly repayment of the consolidation loan. These repayments should be affordable. There are several types of consolidation loans. They can be unsecured or they can be secured on your property. If you consolidate all your debts in this way you need to be confident that all of your unsecured debts are included and that you can afford to make the regular payments for the full term of the consolidation loan, which may be longer than any of the terms of your existing loans. You should also refrain from obtaining any further credit while you are repaying the consolidation loan. Remember that with this option you will be managing your own debt problems and dealing directly with your own creditors. There are various pitfalls in going the consolidation route but if you can answer yes to each of the following questions, then it may be a viable option for you.
Do I have a regular income? Do I have a reasonable level of disposable income i.e. the amount of income left over when I have paid my rent or mortgage, car HP, living expenses (including food, fuel, clothing, transport, energy, phone, council tax, insurances, car tax etc) for both myself any dependants? Do I have a decent credit rating? Am I solvent?
Debt Management
Debt management involves making offers of repayments to your creditors based on what you can afford to pay back. Normally you would prepare a Debt Management Plan (DMP) which you present to your creditors and you seek to get their agreement to your proposed plan to repay your debts. You provide details of your income and expenditure and you show how you will distribute your disposable income to your creditors. Usually you will offer to repay each creditor in proportion to the size of the debt you owe to them. For example, if half of your debts are with one creditor, than you would pay half of your disposable income to that creditor and pay the other creditors on a similar proportionate basis. You do not need any professional assistance to establish a DMP but many debtors use the services of specialist DMP companies.
It is important to be aware that there is no legislative basis for the control of DMPs and for that reason it can be difficult to get all your creditors to accept your DMP proposal. Some may accept and some may not. Some may accept for a limited period of say six months. Some creditors may refuse to freeze interest and penalties on your debts during the life of the DMP. Be aware that a DMP may last for a long time, perhaps up to ten years. Finally a DMP does not offer you any formal protection from your creditors. .
IVA
An Individual Voluntary Arrangement or IVA is a formal insolvency process and is an alternative to bankruptcy. In an IVA you enter an agreement with your creditors that you will repay a certain amount of your debt over a fixed period of time, usually five years. The term could be much shorter (as little as six months) if you can offer a cash lump sum to your creditors. The important point is that at least 75% of your creditors (measured by the amount of your debts to them) must accept your IVA proposal. This decision is taken at a meeting of your creditors and it is binding on all of your creditors, even those who chose not to vote for or against your proposal.
It should be stated that for an IVA to be proposed, you the debtor must be insolvent and the total of your unsecured debts would have to be at least £15,000. You need to have a regular source of income and have a reasonable amount of disposable income left over after taking into account your normal living expenses and the amount you need to keep back to service your secured debts such as your mortgage and car HP. This disposable income is the payment you make each month to your IVA and which is used to pay your unsecured creditors and to fund the administration costs of your IVA. By law, you must utilize the services of an Insolvency Practitioner or IP to assist in the IVA process. The IP’s charges are clearly stated in the proposal and these fees and costs are deducted from the monies you contribute to your IVA. There are no upfront fees to be paid and if your creditors do not approve your IVA proposal, you pay nothing to the IP.
If your IVA is accepted by your creditors, all of your creditors must cease recovery actions against you and must, by law, suspend all interest and charges. The IP assumes all contact with your creditors on your behalf and makes the payments to your creditors out of the monies you pay into your IVA.
Bankruptcy
Bankruptcy is a formal insolvency process and is considered to be a remedy of last resort. You can declare yourself bankrupt or one or more of your creditors may bankrupt you. Your local CAB can assist you in obtaining and lodging the necessary papers in court if you decide to bankrupt yourself, a process known as a ‘Debtor’s Petition’. There are some fees and costs which you will have to pay yourself when lodging the papers. Currently these total less than £1,000. If the bankruptcy order is granted by the court, control of your assets passes to an officer of the court, called the Official Receiver who will either deal with your case or appoint an Insolvency Practitioner (who for this process has the title of Trustee) to deal with your case. The Official Receiver/Trustee then investigates your financial situation to determine your ability to repay your debts. If this is the first time you have been made bankrupt and if you co-operate fully with the Official Receiver/Trustee, you will be discharged from your bankruptcy within twelve months and any amounts still owing to your creditors have to be written off by law.
Bankruptcy may well be the best solution for you if you have no assets, are not employed in a professional capacity and if you are on a low income. If you have a high income you may prefer debt consolidation, a debt management plan or an IVA instead but if you opt for bankruptcy you may be subject to an Income Payments Order for up to three years, notwithstanding the fact that you will be discharged from bankruptcy within twelve months. Remember though that the purpose of bankruptcy is to protect you from your creditors.
DRO
There are some additional remedies other than the big four described above such as Debt Relief Orders which apply to people whose total debts are less than £15,000, who have no assets and whose disposable income is less than £50 per month. Whatever you do, take advice from competent advisors and try to avoid opting for the first solution suggested to you. It pays to shop around and consider all the alternatives.