When people think about their serious debt problems they often think of how dreadful it would be if they had to go bankrupt. Whether they petition for their own bankruptcy or one of their creditors petitions for it, the stigma or perceived stigma of bankruptcy is just about the worst feeling a debtor can have. However, there are other real and practical remedies other than personal bankruptcy. It may even be better for both the debtor and his or her creditors to use an alternative procedure to bankruptcy.
Debt Relief Order
One of these alternatives is a Debt Relief Order (DRO). This is a relatively new procedure and has been available for just over two years, since April 2009. The numbers availing of it have increased steadily with a decrease in the numbers of bankruptcy orders being recorded. For example in the first quarter of 2011, DROs increased by 20% in England and Wales while bankruptcies decreased by 31% when compared with the corresponding period in 2010.
A DRO is not suitable for everybody and there are restrictions on who may avail of a DRO. To be eligible for a DRO your total debts need to be less than £15,000 and you need to have a very low level of disposable income and very few assets. A DRO is especially suitable for people who do not own their own home. Needless to say you must be unable to pay your debts. While you are allowed to own and keep a car up to the value of £1,000 the value of your other assets (excluding your pension) must not exceed £300. The limit on your disposable income is £50 per month which is the maximum you should have left over after paying your tax and national insurance contributions and paying for your normal household expenses.
To be eligible for a DRO, you must also be living in England or Wales or have been living or carrying on business in England or Wales at some time in the last three years. You must also not have been subject to another DRO within the last six years. At the time you apply for a DRO, you must not be involved in another formal insolvency procedure. There is a procedure in Scotland which is somewhat similar to a DRO but the rules are a little different. There is no similar procedure in Northern Ireland as yet.
A DRO lasts for twelve months, during which time creditors named on the order cannot take any action to recover their money without permission from the court. At the end of the period, provided your financial circumstances have not changed, you will be freed from the debts that were included in your DRO. The courts do not run the DRO system. Instead it is are run by The Insolvency Service in partnership with skilled debt advisers called approved intermediaries, who will help you to apply to The Insolvency Service for a DRO. If you have any queries regarding a DRO, you can call The Insolvency Service Enquiry Line on 0845 602 9848.
Administration Order
A little known procedure that is court based is the Administration Order (AO). If one or more of your creditors has obtained a court judgment against you, the county court can make an AO, whereby you make regular payments to the court to pay towards what you owe your creditors. Your total debts must not be more than £5,000 and you will need to be in receipt of enough regular income to make weekly or monthly repayments. While you do not have to pay a fee for an AO, the court takes a small percentage from the money you pay towards its costs. If you do not pay regularly, the AO could be cancelled and you may become subject to the same restrictions as someone who is bankrupt. If you cannot make the payments as ordered under the AO, due to change in your circumstances, you can apply to the court to change the AO. The court which made the AO in the first place will tell you what to do. Details of Administration Orders are available at you local county court.
Debt Management Plan (DMP) and IVA
Other than bankruptcy, there are two further procedures available for people in financial difficulties. To utilize the first of these, a Debt Management Plan (DMP), you need not be insolvent. To use the second one, an Individual Voluntary Arrangement (IVA), you simply must be insolvent. Of course there are various other procedures, such as Debt Consolidation, used to address personal financial problems, but the DMP and the IVA are the most commonly and widely used solutions.
Deciding on which financial solution to go for is a serious matter for the debtor whether insolvent or not. Doing nothing is not an option although some people do choose to bury their heads in the sand rather than face up to and deal with their financial problems. The IVA solution has actually been around for twenty five years now and DMPs although not called that have been around for much longer. These are the three principal options available to address personal insolvency.
In deciding whether to pursue an IVA or a DMP, the debtor can seek to obtain advice from one of the free debt advice agencies such the CCCS or Payplan or go to the local CAB office. On top of that, a large number of commercial providers of insolvency services offer thoroughly professional and extensive advice. More than one such provider should be approached to ensure that not only is the best advice obtained but the full range of solutions is adequately explored and researched. To find out more about an IVA or a DMP, look up these topics on this website. The internet generally has a huge amount of detailed information on these two solutions and The Insolvency Service website also offers comprehensive guidelines.
Key factors to be considered, when comparing an IVA to a DMP, are affordability, duration, sustainability, acceptability to creditors, restoring credit worthiness and sufficient light at the end of the tunnel to offer some hope of being debt free within a reasonable period of time. Remember that the IVA route is only available if the debtor is insolvent and it is not recommended that an insolvent debtor should pursue the DMP route.
Let us make a simple comparison between an IVA and a DMP. For example, let us suppose that the debtor’s liabilities amount to £30,000 and that the debtor’s disposable income is just £275 per month. In an IVA lasting five years – the normal duration for most IVAs – the debtor would contribute £16,500 comprising 60 monthly payments of £275.Assuming that the administration costs of the IVA over its five years duration amounted to £3,000, creditors would be repaid a total of £13,500, a dividend of 45p in the £ on the original debt. The remaining debt of £16,500 would be written off. In one more year the debtor’s credit file would begin to be repaired. This ticks all the boxes for the key factors.
If the same debtor opted for a DMP instead, the full amount of the debt would have to be repaid and at £275 per month, that would take almost eleven years, depending on the administration costs of the DMP and assuming all creditors agreed to freeze interest penalties and other charges. Such freezing cannot be taken for granted in a DMP, given the lack of legislation governing the process. While the full debt is ultimately repaid, the restoration of the credit file could take many years after the completion of the DMP.
A DMP does not always tick as many boxes as an IVA and it does not have the full weight of the law behind it. From the debtor’s point of view, an IVA can be a much more attractive option than a DMP. Certainly, if the projected duration of the DMP is five years or more, then the IVA alternative should be fully explored and considered. A reputable Insolvency Practitioner will of course outline all available solutions and options for the insolvent debtor and provide the pros and cons of each solution. It is best to shop around as no provider has a monopoly of wisdom or experience.