Most of us have personal money worries and want to do something about them. We know that there are solutions out there. The problem we have is that while we know that we need to do something, we don’t know where to begin and so many of us do nothing.
A good starting point is to consider the four main approaches to dealing with personal debt.
These are Debt Consolidation, Debt Management, Bankruptcy and IVA. Each has advantages and disadvantages. We should consider them all before deciding which of them is likely to be the most suitable option for our circumstances. It may help to take advice from a firm which specializes in insolvency before we make up our mind. Let’s look at each option briefly in turn.
Debt consolidation involves getting a loan with which you clear all other unsecured debts and only have to make one regular repayment, usually monthly. The repayments of the consolidation loan should be affordable. There are several types of consolidation loans. They can be unsecured or secured on your property. If you consolidate all your debts in this way you need to be confident that all your unsecured debts are included and that you can afford to make the regular payments for the full term of the consolidation loan. 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 and my dependents?
Do I have a decent credit rating?
Am I solvent?
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, then 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 Debt Management Plan but many debtors use the services of companies who specialize in providing Debt Management Plan services.
It is important to be aware that there is no legislative basis for the control of Debt Management Plan’s and for that reason it can be difficult to get all your creditors to accept your Debt Management Plan 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 Debt Management Plan. Finally a Debt Management Plan does not offer you any formal protection from your creditors.
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 £500. If the bankruptcy order is granted by the court, control of your assets pass to an officer of the court, called the Official Receiver who will either deal with your case himself 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.
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