Tax Credits and Debt

What exactly does the phrase ‘determined’ mean in the circumstance of Tax Credits? The word ‘determined’ simply means that the overpayment of Tax Credits was included in a Final Award Notice (FAN) or in a SOA given by HMRC.

If such a determination hasn’t been made, HMRC are not likely to include any overpayment as a debt in the IVA, irrespective of whether any overpayment is now being recovered (or might be recovered) by restriction of an ongoing Tax Credits award. The reason for this is that HMRC has no way of readily determining the amount (of overpayment) owing.

HMRC will claim to rank for dividend all overpayment of Tax Credits determined ahead of the date of acceptance of the IVA. In addition, HMRC will not claim to rank for dividend any overpayment of Tax Credits determined after the date of IVA approval, regardless if it was related to a period prior to IVA approval or not. Such overpayment is going to be reclaimed from the person in debt by HMRC as a post approval debt. There’s no question therefore that it is in the debtor’s financial interest to have any such overpayment joined as a debt in their IVA rather than to have to cope with it separately.In situations where the financially troubled debtor is married or co-habiting and where their partner or spouse is solvent and is for that reason not entering into an IVA themselves, it is crucial to differentiate whether the Tax Credits overpayment was made to the insolvent person in debt or to the solvent partner or spouse or indeed jointly to both parties. If an overpayment was made jointly to both parties and if the necessary determination as to the quantum of the overpayment was made ahead of the date of acceptance of the IVA, HMRC will most likely input a claim for the debt, in the amount of the full overpayment, into the IVA and HMRC will also get ranking for dividend with the claims of the various other unsecured creditors. The solvent partner continues of course to be liable for settlement of the joint debt as a whole as per the principle of joint and several liability and HMRC will go after settlement from that source, mitigated to the amount of any dividend paid from the insolvent partner’s IVA.

Following the approval of the IVA and once again as long as the amount of overpayment of Tax Credits was established prior to the approval of the IVA, then any restriction of an ongoing award of Tax Credits ought to cease immediately and payment of the debtor’s Tax Credits award ought to return to the normal level with no reduction in respect of preceding overpayment. This is in contrast to Bankruptcy where reduction of recurring award might continue after the debtor is made bankrupt.

If these HMRC rules and procedures are unclear to the insolvent debtor, the Insolvency Practitioner who is acting for them in the preparation of their IVA proposal, ought to clarify all of these issues well in advance of their deciding to carry on or not with an IVA. Entering into an IVA should not leave the debtor any worse off financially in so far as tax credits go and in many cases they will be better off, particularly if they have received sizeable overpayments of tax credits in the past.

People generally want to know how long an IVA lasts before they commit to taking that route. The time period of an IVA really is dependent upon the debtor’s situation. The four key factors are the debtor’s property, liabilities, earnings and living expenses. Of course the approach of creditors is crucial and this is indicated at the meeting of creditors which comes before the commencement of the IVA. In practice the debtor’s IVA proposal spells out the planned duration and while most IVAs have a projected term of five years from the date of commencement the duration can be as brief as a few months or as long as seven years. The shorter duration IVAs are typically based upon what is referred to as a ‘one-off’ proposal, where the major contribution to be made by the debtor is a lump sum payment. In these instances the lump sum payment may for example come from the proceeds of the sale of property, or from the release of equity by the remortgage of property or be funds advanced by the debtor’s wife or husband or by other members of the debtor’s extended family. In the event the person in debt has steady disposable income in addition to assets the IVA could be a combination of a lump sum payment and regular monthly contributions from income and in this kind of case the timeframe might be five years or for a longer time. Nonetheless the use of the lump sum payment can be subject to the debtor’s ability to refund the source of the lump sum payment (family members or re-mortgage company) out of income and in some cases the debtor’s disposable earnings might possibly be mainly committed for that purpose. If that is the way it is, the duration of the IVA could be relatively limited.

A couple of additional factors affect the duration of the IVA. Lenders may, at the meeting of creditors, look for an extension to the suggested time-span in order to boost the dividend or to tackle the potential value which can accumulate in the debtor’s property during the average five years time period of the IVA. The other issue is that the debtor’s situation may change for the worse through the life of the IVA and he or she can no longer afford to pay the monthly contributions which were offered in the initial IVA offer and which were accepted at the meeting of creditors. One solution to this problem is to reduce the monthly payments and to raise the number of monthly payments to be made in order to achieve the dividend initially proposed. The procedure to do this is for the supervisor of the IVA to call a ‘variation meeting’ of creditors to agree to the lower payments and extended length of time. In general IVAs last five years with a small number having a much reduced duration of as little as six months and an even lower percentage lasting six or seven years.

The cost of an IVA is a matter of concern to anybody considering going down that course, especially since they are already encountering financial troubles and can usually ill-afford further expense. Assuming they hire the services of an IVA supplier, should they make or have to make pre-IVA payments to that service provider? This is a hot topic and it is a subject of concern for the OFT. The judgment of reputable firms of IVA providers is that pre-payments are not on their own a major issue providing there is a known and agreed procedure whereby such pre-payments are reinstated to the borrower should the individual elect to withdraw their application for an IVA or in the situation that the IVA proposal is refused at the meeting of creditors. The debtor’s usual hope is that such a pre-payment can become the first monthly contribution to the IVA so as, if the offer was for sixty monthly contributions overall, there would be fifty nine further contributions to be brought in. This is a matter upon which IVA companies have to be crystal clear when working with the borrower. Ideally, the IVA offer itself must divulge whether such pre-payments have actually been made and the entire amount paid prior to the meeting of creditors. Still, creditors might in their wisdom decide that these kinds of pre-payments ought to be on top of the sixty proposed payments and may modify the Individual Voluntary Arrangement in that matter. Whilst the debtor could possibly feel aggrieved, lenders take the view that the IVA clock does not start ticking before the IVA offer is authorized at the meeting of creditors. Lenders feel that if the debtor was able to lodge monies with the nominee leading up to this point, then such funds ought to go towards improving the dividend for their gain. Here is the text of a typical amendment to IVAs made by creditors at the meeting of creditors regarding payments made to the nominee pre IVA:’ the balance of any payments made to the nominee or any third parties in relation to the original consultation or preparation of these proposals, less the fee agreed by the debtor, will immediately be paid into the arrangement for the benefit of unsecured creditors. Any such sums are to be paid in addition to the contributions offered in the original proposal.’

Why would a borrower trust in the advice of an Insolvency Practitioner (IP) and what credentials does an IP require? To become certified as an IP in the UK, one has to have a specified minimum number of hours of experience of operating in an insolvency business, currently approximately 600 and also to have passed the Joint Insolvency Examination Board (JIEB) examinations. Virtually all IPs would also be accredited accountants and be paid members of a relevant recognized professional body (RPBs). An IP’s support team would usually include qualified accountants as well as people with supplementary skills in insolvency such as the Certificate of Proficiency in Insolvency (CPI). Every business which provides insolvency solutions using the services of such specialists and supporting debt advisors needs to have a consumer credit license. The R3 internet site can provide information about relevant insolvency credentials in Great Britain. Surprisingly, there is no insolvency certification comparable to the JIEB in the Republic of Ireland nor is there the requirement for a debt adviser there to hold a consumer credit license. It is predicted that new laws recommended by the Law Reform Commission final report on Personal Debt Management and Debt Enforcement, which was published in December 2010, will be put into law in Ireland in the next year. It is expected to deal with the need for insolvency certification and to apply a regulatory and accreditation regime akin to that presently in place in the United Kingdom.

Naturally, the IVA proposal should also be the insolvent debtor’s best endeavor to tackle their unsecured liabilities and the expected pay out to creditors ought to be reasonable. This yield is often called the estimated (or projected) dividend and is usually expressed as the percentage of the debts which the insolvent debtor promises to repay. To illustrate if the debtor estimates that lenders will get back a quarter of the funds taken out by the person in debt then the estimated return is 25% or 25 pence in the pound. It is for lenders to determine whether the dividend is acceptable or not. Lenders make this determination taking into account the debtor’s situation and they exercise their judgment as to whether the offer is the debtor’s best effort to sort out their debts.

Apart from the reliability of the offer and the expectation of a decent dividend, there are a variety of other criteria which creditors apply. Consider the case of a self employed (S/E) individual who is offering proposals to creditors for an IVA and who has liabilities to HM Revenue & Customs (HMRC). If the debtor has a reputation for non-compliance then HMRC are likely to reject the proposal. The commonest such non-compliance and in all probability the most significant one is the failure to make S/E returns to HMRC. If S/E returns are up to date, HMRC may well consent to the IVA proposal despite the fact that the debts to HMRC are considerable, so long as returns are up to date. The way in which HMRC looks at this issue is that the cost of making S/E returns is frequently small and even if the debtor is not able to make full tax and associated payments once they fall due, the failure to make returns implies a lack of goodwill and prospective future issues if the IVA were to be accepted.

HMRC also puts great store in the idea of treating all unsecured creditors the same. They particularly do not like an IVA proposal in which what’s sometimes referred to as a hostage creditor attempts to be looked after more beneficially than other lenders. For an S/E person, a hostage creditor might, by way of example, be a vital seller of products and/or services to the debtor’s company and who will only carry on doing business with the person in debt if they are omitted from the debtor’s IVA and if they are given payment in full for all debts incurred by the debtor ahead of the IVA being authorised. This is needless to say preferential treatment for that creditor who is holding the person in debt hostage. From the debtor’s standpoint, it’s an instance of damned if I do and damned if I don’t! If they include the hostage creditor’s debt in the IVA, that creditor will probably stop providing crucial products or services and the debtor’s enterprise may not succeed for that reason which in turn could cause the IVA to fail. If alternatively the borrower does not disclose the debt to the hostage creditor and excludes it from the IVA, fully aiming to service that liability covertly, than again the IVA may be unsuccessful when and if the supervisor of the IVA or another creditor uncovers the preferential treatment. In these scenarios the debtor’s business is also likely to fail. This sort of debtor could hardly be characterized as being open, frank and honest.

Creditors might also reject an IVA if it’s quite likely that in a Debt Management Plan (DMP), all lenders could be settled in full in less than ten years and in some instances in a period of one hundred months. Although such an outcome could rely upon some or all interest and penalties being frozen during the life of the DMP, that’s certainly not guaranteed, given the differing strategies that different creditors adopt when engaging with a DMP.

The business relationship between the lender and the person in debt can also be a major aspect in forming the creditor’s attitude to the IVA offer. If the consumer is a relatively recent client and the liability was sustained within the previous six months, it would not be surprising for the creditor to turn down the IVA. Conversely if the debtor was a long standing client of say twenty years and the new liability was only a consolidation of various already present liabilities with that lender, then it would be less likely that that creditor would turn down the IVA, given the long term knowledge of the debtor’s credit history.

The main other factors that can have an effect on the thinking of creditors to an IVA proposal are the past conduct of the debtor, the viability of the IVA, the charging of property and the former (and present-day) lifestyle of the borrower. Let’s explore these in turn.

Creditors expect to see that the debtor will be open, candid and honest in disclosing all pertinent factors in the IVA offer. If a creditor is aware of a significant matter relating to the debtor’s former credit history and applicable to the debtor’s present monetary troubles and the matter is not disclosed in the IVA proposal then that lender would be strongly prepared to disclose the matter to the nominee, assuming that the creditor’s understanding of the matter is entirely legitimate and is based on past business or personal dealings with the debtor. The Data Protection Act would not protect the person in debt from such disclosure. At any rate, it would not come as a surprise that that lender would reject the IVA offer, even while not supplying any cause.

Creditors will also exercise their judgment and discretion where the projected dividend is so low that it is not fiscally viable for the lender to agree to the IVA. Suppose as an example that the debt was £500 and the predicted dividend in a five years IVA is 20p in the £. Although the creditor could expect to obtain a dividend of £100 over a duration of five years, the management costs of furnishing a proof of debt and holding the account open could be excessive and not beneficial financially. Such a lender might turn down the IVA offer.

A further situation which occurs is where the creditor has already taken legal steps to guarantee the debt by obtaining a charging order against the debtor’s property. Suppose that a creditor has already obtained an interim charging order whenever the debtor’s IVA proposal is delivered. That lender has two choices. The first choice is to go on to get a final charging order and depend on that for the satisfaction of the liability in hopes that the IVA will be declined so that the charging order can be made absolute. If the creditor were to rely on the charging order, then that lender wouldn’t be allowed to vote for or against the IVA and if the IVA were to be authorized ,, the charging order would not be granted by the court and the creditor could claim as an unsecured creditor in the IVA, receiving the same dividend as the other unsecured creditors. The other choice available is for the creditor to sacrifice their security and hand in an unsecured debt claim in the IVA and so be permitted to vote for or against the proposal. In the event the IVA proposal were to be turned down, the lender could re-apply for a charging order once the meeting of creditors is ended.

The last situation is when the chosen lifestyle of the borrower leads a creditor to conclude that an IVA would be very likely to be a failure in supervision. Lenders may explore how debts were accrued from the outset. If the borrower engaged in a opulent but unsustainable way of living over a duration of time seemingly not caring whether such lifestyle debts could be paid back or worse, borrowed recklessly knowing that the debts could not be repaid in any sensible period of time, then lenders would be predisposed to reject such a proposal. If the debtor’s lifestyle involved long term obsessive behaviour such as excessive wagering, alcohol consumption or taking narcotics and if the financial distress appeared to be as a consequence of such conduct, lenders would need to be satisfied that such behaviour had ceased and that the consumer had taken reputable corrective steps to retain the transformed behavior, in advance of accepting this type of IVA.

An IVA offers the insolvent debtor with respite from their debts while allowing them to pay back as much of their debt as possible to their creditors. It avoids the stigma of bankruptcy with its linked disabilities, restrictions and responsibilities while at the same time it permits the borrower to maintain better control over assets by being able to hold on to their home and car. They can preserve their job or if doing business on a self-employed basis, they can usually continue in enterprise for the entire duration of the IVA, resulting in higher dividends for creditors.

An IVA is binding on all lenders, including dissenting creditors, provided the IVA proposal is backed up by 75% or more of voting lenders, as calculated by value. From the perspective of lenders, an IVA will likely yield a greater level of realizations than bankruptcy, and the administrative costs of an IVA are considerably lower than those in bankruptcy. Both of these factors bring about higher returns for creditors. The borrower is subject to less publicity in an IVA and avoids the compulsory publication in papers and other journals which is common procedure in bankruptcy. If the debtor’s circumstances change significantly over the duration of the IVA its terms may, with the permission of lenders, be adjusted.

There is minimal and reducing court participation in an IVA and government policy has been to streamline IVA systems for the benefit of borrowers and creditors alike. The administration of IVAs is nevertheless highly regulated. The insolvency practitioner’s activities are subject to overseeing and auditing by his or her own regulatory body which wields extensive powers of sanction for non-compliance. The insolvency business in general is governed by the DTI with oversight review by the OFT on behalf of the consumer.

When an IVA is approved, creditor contact with the borrower ends, interest on all unsecured debts is frozen and penalty charges are stopped. All liabilities are tackled and written off in a known and finite length of time, generally five years. In the majority of IVAs the borrower makes affordable monthly payments out of disposable income and may have to contribute a lump sum if he or she owns property which is in positive and realisable equity. A short term IVA can be authorized by lenders when the borrower has hardly any disposable income but can offer a single one-off lump sum payment, with the funds generally coming from the proceeds of the sale of property or from the aid of a third party such as a family member.

There are also some down sides with an IVA. The insolvent borrower has to pay the set-up, administration and disbursement expenses of the IVA. There isn’t any time related automatic release from an IVA similar to what is obtainable in bankruptcy. The time period of an IVA during which payments must be made is often five years versus a maximum of three years in bankruptcy. If the IVA is not approved, creditors are free to use other legal actions such as petitioning for the debtor’s bankruptcy, obtaining court judgments against the debtor or registering charges on the debtor’s assets. A high level of lender authorization is necessary to approve the IVA. At least 75% by value of the voting lenders must agree to the debtor’s proposals for the IVA to be accepted.

Lenders also may insist upon changes to a debtor’s IVA offer which often have the impact of increasing the debtor’s monthly contributions. Creditors frequently cut the debtor’s allowances for cost of living to a more significant degree than what is permitted in bankruptcy. The higher financial burden on the borrower could cause the IVA to be unsuccessful in the course of its term of supervision if the borrower is not able to keep up the increased amount of contributions demanded. During the last number of years lenders have used the services of voting agencies to act strongly on their behalf at the meetings of lenders where IVAs are approved or rejected. These agencies try to increase the dividend yield from the IVA for lenders. They do this by seeking enhanced contributions from the borrower and by lowering the service fees of the insolvency practitioner (IP). This two-pronged strategy adds to the likelihood that the IVA may fail in supervision, if the borrower is not able to maintain payments, and makes the IVA less commercially viable for the IP. Employing such voting agencies adds expense to the IVA system but creditors may feel that efficiencies brought about and greater debtor contributions result in increased net dividend yields.

The debtor is stopped from undertaking any additional borrowing through the life of the IVA, other than with the express authorisation of the supervisor and lenders. The debtor will endure the consequences of a weak credit rating even after completion of the time period of the IVA with his or her name continuing to appear on credit files, as managed by the credit reference agencies, for six years from the commencement of the IVA or from the time when the delinquency was first recorded.

Let’s look next at the benefits of bankruptcy. Beginning the course of action is quite easy since insolvent borrowers may petition for their own bankruptcy. Creditors may also petition for a debtor’s bankruptcy. The cost of petitioning is comparitively low – around £700 currently. No other legal charges are incurred. Citizen Advice Bureau officers and Court officers can assist the debtor in filling in relatively simple documents and submitting them. The debtor is automatically released from bankruptcy after one year, provided it is a first time bankruptcy. Most, if not all, debts will not survive the bankruptcy. All further communication involving the insolvent person in debt and lenders ends with the borrower experiencing the resultant reduced pressure and worry.

The period of time in which the borrower has to make contributions is restricted. Income Payments Orders (IPOs) and Income Payments Agreements (IPAs) are restricted to three years and in many cases no IPO or IPA is applied when the debtor’s disposable income is considered to be too low. The debtor receives more favorable I&E allowances than are allowed in an IVA and consequently is left with additional income on which to live, although this benefit has waned to some extent in recent years.

There are also considerable downsides to bankruptcy. Traditionally and even today the key issue for many people was the stigma of bankruptcy with its linked disabilities, obligations and restrictions which made it hard and frequently impossible for the debtor to do business (commence or continue) or to secure or hold on to employment. Bankruptcy can be a career breaker with many professions and trades imposing sanctions on insolvent people in their organizations, which includes the ultimate sanction of expulsion. The insolvent person also faces potential liability for any bankrupt offences he or she may have committed. The trustee has powers to contest the legality of any previous transactions if they appear to be preferential or at an under-value. Some bankruptcy constraints may be placed for between two and fifteen years.

In bankruptcy, the debtor sheds power over his or her assets, and is likely to lose their home or their share of it. The debtor’s poor credit rating continues even after discharge from bankruptcy and their name will continue to show up on credit files that are maintained by the credit reference firms for six years from the beginning of bankruptcy. The borrower is unable to engage in any further borrowing before discharge without the express permission of the trustee. The most significant disadvantage for lenders is that the greater costs of bankruptcy result in lower returns and in many bankruptcies, creditors receive absolutely nothing.

In arriving at a determination, the insolvent debtor can tick the boxes that apply to him or her for both processes. If making a choice continues to be too hard, it’s a good idea to consult with an insolvency specialist who can clarify any remaining queries, bearing in mind the individual circumstances of the debtor and particularly in relation to what the debtor really wants to accomplish in terms of repaying as much as possible of the money owed, evading stigma and reconstructing credit worthiness.

The debt solution of last resort as it is often times called is bankruptcy. Bankruptcy may occur in two main ways. When a creditor looks to obtain a bankruptcy order against a customer from the court, this is called a creditor’s petition. When the borrower tries to obtain a bankruptcy order against him or herself, this is known as a debtor’s petition. If made bankrupt by order of the court, the borrower will find that the official receiver or a trustee assigned by the official receiver usually takes control of any resources which the insolvent debtor owns and look to realise any value in such assets for the advantage of lenders. Any extra earnings that the debtor has will also have to be provided for the benefit of creditors but such obligatory payments are nowadays limited to a maximum period of three years.

A debt alternative that may be less serious for the borrower than bankruptcy is an Individual Voluntary Arrangement or an IVA. A great deal has been written in relation to the pros and drawbacks of IVAs so this brief article is simply going to consider the treatment of the debtor’s house when he or she gets into an IVA. To begin with, under the laws, all IVA proposals must provide the debtor’s Statement of Affairs. In it, all the debtor’s assets and liabilities have to be revealed and it must also incorporate an Income and Expenditure Statement regarding the debtor’s household. The chief possession that a debtor might have is a share in the ownership of the home. Such a property may very well be mortgaged and it may or may not have equity in it, dependent on whether or not the present-day realisable worth of the house is greater or lower compared to the due mortgage liability. The consumer will have equity when the amount of money necessary to redeem or to pay off the balance of the mortgage is less than the valuation of the house. The monthly mortgage payment is typically the greatest item of spending on a family’s Income and Expenditure Statement.

When a person in debt presents a offer to creditors for an IVA, he or she must reveal a lot of details about their assets including such a property. It has always been standard practice for creditors to want some part of the equity in the property to be realised and contributed to the IVA. The person in debt may have also predicted this condition and dealt with any such value in their property in the IVA offer, announcing how they offer to realise the equity and how much of that value they are willing to contribute to the IVA. Just one benefit of an IVA is that the debtor will not usually forfeit their house which they will likely do in Bankruptcy.

Any time a property owning borrower hasn’t dealt with such equity in their IVA proposition, the common approach adopted by creditors is to adjust the IVA offer looking for them to do this. The modification in general spells out how this is to be carried out and also how much of the equity is to be donated. This sort of change commonly requires the supervisor of the IVA to get a minumum of one third party valuation (and sometimes two valuations) of the debtor’s property during the fourth or fifth year of the IVA. The consumer is usually additionally required to get at least one proposal of re-mortgage and to donate at a minimum 75% (and from time to time up to 100%) of their share of the equity to the IVA.

Every IVA differs from every other one and there can be considerable difference in how various creditors ask for equity to be dealt with. A range of issues may crop up when it’s time for the fourth year valuation modification, as it is regularly described, to be accomplished. The property could possibly be in negative or zero equity. The equity may perhaps be so little that that the expense of realization wipes it out. Even when there is some equity in the property, the consumer may find it extremely difficult to get a re-mortgage for several factors like the market meltdown, a poor credit score or mortgage companies placing a limit on the loan to value (LTV) rate. Furthermore, even if there could be equity available in principle, it may be tough to realize it in reality. It can also be that high street lenders won’t give a re-mortgage at all and only the so-called sub-prime loan companies are prepared to do so but only at adverse rates of interest, with the consequent long term impact on the borrower’s finances.

What can the debtor do, seeing that failure to contribute an equity lump sum would likely depress the dividend payable to creditors appreciably? The usual response is for the consumer to offer a variation proposal to lenders. Such a variation can merely ask for the removing of the equity modification, permitting the borrower to successfully complete the IVA without making any equity contribution. If lenders were to agree to such a variation, they might collect a dividend comparable to that originally proposed but lower than that required by the creditor amendment. Alternatively, the borrower may present a variation offer offering to extend the period of the IVA for as long as one further year and to bring in more monthly income based contributions in lieu of any value in the property. Though increasing the arrangement by up to twelve months may not be attractive for the borrower or indeed for the creditors, it is obviously preferred to re-mortgaging at detrimental interest rates. Lenders needless to say retain the power to refuse or to seek to alter any variation plans submitted by the person in debt but extending the time period to deal with equity is frequently acceptable to them.

The insolvency practitioner (IP) supervising the IVA will guide the consumer on the choices in relation to dealing with equity and creditors are usually sympathetic to consumers who are sincerely endeavoring to address their monetary issues.

Student loans obtained from The Student Loans Company are different from virtually all unsecured loans insofar that they may not be written off in an Individual Voluntary Arrangement (IVA) or in Bankruptcy. It’s wise for students then to think through how they are going to finance themselves when entering into third level education and to take steps to minimise future monetary suffering. The National Association of Student Money Advisors attempts to give practical help and support to college students in further and higher education by providing advice on education loans, budgets, credit and keeping credit status.

Higher education students can obtain funds from The Student Loans Company to cover tuition fees and living costs. The interest rates charged on these borrowings are linked to the cost of living and are for this reason comparatively low. Generally loan repayments commence after the individual graduates, as long as gross salary is greater than £15,000 p.a. although this threshold is planned to be raised to £21,000. According to the new codes the outstanding balance of the student loan will be written off after thirty years, with the clock beginning to tick from the April immediately after finishing of the education course. Any higher education student who enters an IVA or who themselves petition for Bankruptcy or who is forced into Bankruptcy by a creditor’s petition will quickly realize that their student loan will survive both of those types of procedures and the outstanding balance of their student loan continues to be repayable up to the thirty years threshold.

While still a student, it is vital to put together a household budget on a yearly basis and also to adhere to it. In truth a financial plan covering the full length of the student’s course is recommended with periodic revisions to take account of the cost of living (or deflation). The student should look to get NUS card discount rates, to buy own brands food in bulk and to shop in markets. Ideally students should minimize going out to restaurants and should as a basic practice look to prepare food, eat and drink at home whenever possible. The opportunity to get free household furniture and household goods should be pursued proactively, by using small adverts to source these kinds of requirements, for example. Shopping around for discounts can deliver significant savings and making use of price comparison websites may help to identify more affordable utilities and insurance.

At the end of the day some level of debt will be necessary for the vast majority of students. The first principle of prudent borrowing is to avoid borrowing more than you can afford to repay and ensure that monthly payments are made in time. If sharing a house or flat with friends or acquaintances it is vital that they split the burden of paying household costs on a regular basis. Protect against having everything put into your name. If utilizing a credit card, paying off the whole debt owed each month can boost credit history and significantly lower the accumulation of interest and penalty charges. Seek out help and advice when you require it. Your NUS rep, your student union or CAB will be ready and hopefully eager to help.

Whilst you’re a undergraduate you can begin to establish your own personal credit score. Start off by taking a look at your credit track record. Check out Experian who could possibly provide a free credit profile. Register to vote and utilize that address for credit applications. Apply for credit discerningly and only from time to time. If you make too many ‘willy-nilly’ applications for credit then financial institutions may start to have reservations about you and they may judge you to be desperate. Even if you may receive credit you may have to pay premium interest rates on any funds borrowed. Monitor your credit rating. A superior ranking will give you superior offers and reduced interest rates.

The popular Fine Gael led government currently has the opportunity to change all that. Fine Gael’s pre-election policy on personal debt stated that it proposed to change Irish bankruptcy laws and to create new legal processes to contend with personal and commercial over-indebtednessthat would allow people to avoid the bankruptcy process first and foremost. It proposed to bring in a flexible bankruptcy system similar to Northern Ireland’s system that would enable the courts to set bankruptcy terms based on each individual’s circumstances. It would consider whether there had been any fraud or undue recklessness on the part of the insolvent individual or if the insolvency came about simply because of inescapable changes in the debtor’s position. Where it was established that the debtor had engaged in reckless or fraudulent dealings, a restriction order could be granted together with a lengthier bankruptcy period so as to punish the debtor and to deter against such conduct in the future.

Fine Gael proposed to develop an out of court debt settlement system similar to the present system in Northern Ireland that would offer a route for firms that are owed money to demand settlement utilizing an officer of the courts to force a settlement and that would bring about no repercussions for the debtor if settlement were made. It also offered to introduce an Individual Voluntary Debt Plan (IVDP) similar to the UK’s Individual Voluntary Arrangement (IVA) which would be a brand new legally binding arrangement. Under the IVDP an indebted individual and his or her creditors would consent to having a schedule drawn up by a certified insolvency professional or practitioner to restructure the individual’s due liabilities. The IVDP would be voted on by lenders and would shield the individual from interest charges and the risk of enforcement while due liabilities would be restructured and resolved.

For small firms going through debt difficulties, Fine Gael promised to bring in what it referred to as a Commercial Voluntary Debt Plan (CVDP) which would be the same as the Company Voluntary Arrangement (CVA) in the UK. The new system would aid small firms battling in the recession to restructure their debt and enterprise with the help of professional insolvency practitioners while under the protection of the State, as a result avoiding the excessive cost of the examinership process.
It now falls to the new coalition government of Fine Gael and Labour to enact suitable new personal insolvency legislation in Ireland in accordance with its policies. Much of the hard work was carried out by the Law Reform Commission (LRC) which completed its recommendations for change to the insolvency laws when it published its final report on Personal Debt Management and Debt Enforcement in December 2010. The LRC went one step further when it included as an appendix to that report a Draft Insolvency Bill 2010. Much credit must go to the Green Party which unfortunately lost all of its seats in the general election in February 2010. After pressing for change in the area of personal insolvency legislation it found itself out of office before it could bring in or enact new legislation. The financial tsunami presently engulfing Ireland at a sovereign level has clearly diverted the attention of government from the travails of the personally insolvent citizen. However, the IMF, ECB and EU troika have demanded the reformation of Irish personal insolvency law and have set a timeline of March 2012 for implementation.

The recommendations contained in the LRC’s draft bill are quite significant. They say, for example, that debtors should not be jailed for non-payment of debt even in cases where the debtor can afford to pay but refuses to do so. The suggested sanction is community service and not jail time.

This is not the only significant suggestion. The draft bill provides for what is actually debt forgiveness although it is obvious that the use of the words ‘debt forgiveness’ is studiously sidestepped. In fact in the 440 pages report the word ‘forgiveness’ appears only three times and two of those appearances are quotes from other sources. It appears that the report adheres to the letter of the words of the former and now-retired Fianna Fail Minister of Justice Minister Dermot Ahern when he ruled out ‘debt forgiveness’ for ordinary people in May 2009 when the LRCs interim report was launched.

In spite of the heavy hand of such political direction, the LRC has exhibited significant courage and enlightenment in ensuring that the nature of its final report and the draft bill contain generous provisions for what is debt forgiveness in all but name. In particular the plans for insolvent debtors with no earnings and no resources (NINA) provide for what are described as Debt Relief Orders. In effect qualifying debtors would be able to have their unsecured liabilities entirely written off inside of a twelve months period of time so that they could start off afresh. It is likely that there would be a threshold on the overall quantum of liabilities. Above that ceiling a Debt Relief Order would not be obtainable for the insolvent borrower but the threshold has not been stipulated as yet. In the UK the debt upper limit is £15,000.

The major provision proposed by the LRC was the setting up of a Debt Settlement Arrangement (DSA) system whereby insolvent borrowers could pay what they could manage for a interval not surpassing five years, after which the unpaid balances of their liabilities would be wiped out in their entirety. Under this plan at least 60% of voting creditors as calculated by the value of unsecured debts would have to agree to the DSA for it to be authorized and binding on all unsecured creditors, including those who chose not to vote on the proposal.

Other provisions suggested by the LRC included establishing a Debt Enforcement Office (DEO) to arrange non-judicial settlement of debts; setting up a Debt Settlement Office (DSO) as an integral part of the DEO to licence and control insolvency practitioners, to be known as Personal Insolvency Trustees and creating a regulatory regime to control debt collection and debt advice bodies.

Whilst the LRC itself originally omitted detailed consideration of and recommendations for amending Irish Bankruptcy law (or formulating new law) from its scope and terms of reference, it has in fact and in spite of itself, made thirteen very specific recommendations (provisions) relating to bankruptcy in an appendix to the report – on top of its clear assertion picking out the necessity to reform the Bankruptcy Act 1988. A footnote to that appendix makes fascinating and fairly incredulous reading: ‘The commission has not included these provisions in the draft Personal Insolvency Bill in Appendix A as it understands that a new legislative framework to reform the Bankruptcy Act 1988 is currently (December 2010) under consideration’.

It seems very clear that the LRC was particularly dissatisfied with the lack of political progress in taking steps to address the reform of bankruptcy law, an enormous undertaking which could take many more years to carry out, even if the entire resources of the LRC were allocated to it. Can the imagination, vitality and determination of a new government shorten that timescale? It would be astounding and indeed unacceptable if Ireland’s draconian bankruptcy law, though seldom employed, could possibly remain the law of the land for another half decade or more. The IMF, ECB and the European Commission were able to descend on Dublin at short notice and in a matter of weeks agree measures to tackle the insolvency problems of the Irish banks and of the sovereign state itself. The competence, urgency and energy displayed so far by the new Fine Gael and Labour coalition government gives some hope for optimism. For the hard pressed insolvent Irish consumer the hope is that the penalty for debt is neither capital punishment nor a life sentence.

Since a DMP is an informal approach, your lenders can’t keep you from acquiring even more credit while in a DMP. However, it is contrary to the spirit of the plan that you should do this and creditors who have accepted your DMP in the beginning will almost certainly reject it if they find out that you’ve harmed the nature of the agreement in this manner. It’s because whenever you entered the DMP, you committed to employ all of your disposable income to address and settle your pre-existing liabilities.

All unguaranteed liabilities for instance loans, credit cards, store cards and bank overdrafts are incorporated in a DMP and you settle all of these kinds of obligations eventually. In contrast, your collateralized debts such as your mortgage or HP agreements are prioritized in your income and expenditure computations, so that you do not go delinquent on these obligations. All these secured liabilities have to be paid in full on an continuous basis and you cannot fall into arrears with them.

The key benefits of a DMP can be summarized as follows: creditors prefer Debt Management Plans to other systems for handling financial problems; you don’t have to release equity from property; you will pay back all of your debts; your fiscal information will not be placed onto the Insolvency Register; you just pay precisely what you can afford and the DMP is made to match your personal situation and needs. Do not forget nevertheless that lenders don’t have to consent to diminished repayments or freeze interest and charges and there’s no warranty that any recent or threatened proceeding is going to be stopped or withdrawn and any debt collection charges incurred by your creditors will normally be put into your debt.

If you utilize a Debt Management Company to manage your DMP you must pay charges. These charges fluctuate somewhat from one firm to another. Generally you pay a set up fee the same as your initial monthly payment into the DMP which means that lenders are given nothing for the initial month. Thereafter, charges are generally a set percentage of your monthly payment. An average monthly fee is 15% with a minimum of about £25 and a maximum of about £100. As you shop around, you will see that costs differ.

Entering a DMP detrimentally affects your credit rating even though it could possibly already have been affected should you have arrears on your credit accounts or if you’ve got a record of skipped payments or overdue payments. Your Debt Management Company makes the offer of reduced monthly payments to your creditors which means that you will no longer be making the payments initially agreed upon. Therefore the original contracts into which you entered with your lenders will be broken. Records of these non-payments may and probably will be created on your credit file. The credit reference agencies retain delinquency data for six years.

Since a DMP is flexible and simple, it isn’t as rigorous as other processes and for that reason can respond promptly in case you undergo a transformation in your circumstances, for better or for worse. If this happens, you should call your DMP Company and inform your liaison officer of any changes particularly with regards to your income and expenditure or direct communications from your creditors. Your DMP Company can contact your lenders, communicate any problems that arise from your changed situation and suggest solutions that satisfy both you and your lenders.

While many people that enter a DMP are employed it’s not necessary to be, so long as you’ve got a source of income that is greater than you need for living expenses. However, people who have recently come to be unemployed and who are actively in search of work might look into offering their creditors a short term DMP, especially when they have got decent prospects of gaining employment with a decent level of disposable income. Even people whose total income is comprised of benefits can offer a DMP to their lenders but because their level of disposable income is likely to be low, it may well be that an alternative remedy such as bankruptcy or perhaps a Debt Relief Order may be a more suitable and relevant remedy. Other solutions to financial difficulties that can be considered include Individual Voluntary Arrangement, Debt Consolidation, Asset Sale & Debt Settlement and Property Remortgage & Debt Settlement. The possibility of financial assistance from a family member or friend ought not to be forgotten.

Good Debt Management Companies provide complete confidentiality and privacy in relation to your DMP. No data about you is disclosed to any outside organizations including your employer. Particular care is taken when making contact with you to make sure others will not learn about your circumstances. Of course you have to conduct yourself cautiously yourself in your communications with your lenders and with your Debt Management Company to make sure that your employer does not discover your DMP inadvertently.

Insolvency is not a necessity for entering a DMP. It may be that your income combined with your assets is enough to pay off your liabilities in full in keeping with the terms of your agreements with your lenders. To illustrate, you might have enough equity in your property to repay your debts when your income is considered but if you can’t obtain a re-mortgage, you might have to sell your home to produce that equity. A DMP may possibly give a way of delaying the selling of your property or provide you with a little breathing space until such time as you are able to get yourself a remortgage on acceptable terms.

However, you may find when you go to your vendor to order your car that your supplier recommends that you take out or enter into a Hire Purchase Agreement. You ought to listen diligently to the phrases used by the dealer and read carefully any documents provided. If you acquire a car under a Hire Purchase Agreement, the car is not your property – at least not yet. The text ‘Hire Purchase Agreement’ just signifies that you have entered into an agreement to hire the vehicle with an option to buy it. Hence you don’t have the authority to sell on such a vehicle. Although you may have paid a deposit in cash or otherwise or traded in your own vehicle as part satisfaction of the Hire Purchase Agreement, that does not cause you to be the owner of the vehicle.

For that reason, when you go to purchase a car it is very important to distinguish between financing the deal (in whole or in part) with an unsecured loan and financing it (again, in whole or in part) by into a Hire Purchase Agreement – let’s call it simply HP. The first step is to question whoever is funding the deal and to establish if it is a secured or an unsecured loan you are being offered. If you are being offered HP, you’ll have an opportunity to check out the contract documents. Be sure that the papers are titled ‘HIRE PURCHASE AGREEMENT REGULATED BY THE CONSUMER CREDIT ACT 1974’. An alternative title used in HP documents is ‘CONDITIONAL SALE AGREEMENT REGULATED BY THE CONSUMER CREDIT ACT 1974’. They are both suitable titles for HP.

If you wish to be doubly sure, check the wording of the HP agreement. The words of the agreement ought to include a part called TERMINATION: YOUR RIGHTS’. This part confirms that you have a right to finish the agreement and explains how you can and should go about doing so, if that is what you want to do. Furthermore, the text of a correct HP Agreement should also include a section titled ‘REPOSSESSION: YOUR RIGHTS’. This section explains your legal rights in the event that the HP company plans to repossess the vehicle. There are other standardized sections in a valid HP Agreement and if the agreement before you ticks all the boxes above, then it is highly likely that that is what it is. You won’t become the proprietor of a vehicle purchased under a Hire Purchase Agreement until you’ve settled all the finance payments due in the agreement and exercised your ‘option to purchase’ right at the end of the term of the agreement.

In the event that you enter into an Individual Voluntary Arrangement with your lenders, you’ll have to carry on and pay the full amount of the monthly HP payment. As a collateralized obligation, the HP agreement is comparable to a mortgage in that respect. The HP loan cannot be entered into the IVA unless you go into default on your HP payments. If you do go delinquent on your HP payments, the HP provider can, and probably will, repossess the vehicle (according you your due rights within the contract). Any deficiency that comes up would attain ‘unsecured’ status and be entered into your IVA as an unsecured debt. At that point it would rank for dividend equally with all other unsecured debts.

In the first instance a DMP is an informal and flexible arrangement designed to suit your own personal circumstances and needs. You make payments into the plan from your income on a regular basis, usually monthly, and payments are tailor made in line with what you can afford and sustain. In this way you will repay all of your unsecured debts to your creditors over a period of time. The duration of the DMP depends on the total size of your debts and the rate at which you can repay them and this can be calculated at the outset with a fair degree of accuracy. You will usually neither be forced to sell your property nor to remortgage it to release equity and contribute funds from that source into your DMP, although there are exceptions to this if your property equity is substantial, available and realisable. Your personal financial details will not be published on the Insolvency Register and your financial circumstances are not routinely made available to family, relations, friends or employers. Only the debt management firm you choose to engage and your unsecured creditors are privy to the DMP and they are bound by the constraints of their duties to you as a client and customer to preserve your rights to privacy and confidentiality and to comply with the requirements of the data protection legislation. Particular care is taken when making contact with you to ensure that others will not find out about your circumstances. It is also significant that creditors generally prefer their customers to enter into debt management plans than to engage in other processes for resolving their personal financial difficulties.

The liabilities that must be entered into your DMP are all of your unsecured debts. This means that you must include all personal loans including personal loans taken out jointly with your spouse or partner, credit card accounts, store card accounts and bank overdrafts. You do not include your secured debts such as your mortgage or your HP agreements. Secured debts must be prioritized in your income and expenditure calculations and you must make the full contractual payments of these, month in and month out, so that you do not fall into arrears on any secured debts. If you do fall behind in servicing your secured debts, you are in danger of having your house or car repossessed.

A major concern for anyone considering entering a DMP is how much they will have to contribute from their income. The reality is that a DMP is designed to ensure that you only have to pay what you can realistically afford to pay on an ongoing basis. That is why the amount to be paid is calculated by constructing an income and expenditure statement. This takes account of your household income and your living expenses, including the living expenses of your dependents. The amount you will have to pay each month depends on your personal circumstances and is calculated to suit your individual needs and those of your family and dependents. While you do not need to be employed to enter a DMP, you do need to have a source (or several sources) of income. Clearly the total amount of your income needs to exceed the amount you need to cover your household for living expenses. The amount by which income exceeds expenditure is the amount you will be required to pay into your DMP for the benefit of your creditors. The debt management company you have engaged retains a small portion of this payment to cover the administrative expenses of managing the DMP.

A second concern for anyone considering entering a DMP is whether creditors will agree to accept the offer of payment, the proposed DMP. No guarantees can be given in this regard. Creditors are not legally obliged to accept your DMP proposal and they may insist that you the debtor adhere to the original terms and conditions under which your loan was originally taken out. However, creditors are pragmatic and clearly if you are already falling into arrears in servicing a loan agreement it can make good business sense to accept a structured repayment plan such as a DMP really is, rather than pursue full repayment. There are many firms in the debt advice sector offering debt management services and which will negotiate with creditors on your behalf. Many of these firms have an excellent track record in getting proposals for DMPs accepted. However, creditors do not have to accept offers of reduced payments from debtors or freeze interest on loan accounts or stop applying charges for late payments. Neither is there a guarantee that any current debt recovery action will be suspended or that the threat of any proceeding or action will be withdrawn. Indeed any debt collection costs already incurred by your creditors will normally be added to your debt. Should you offer your creditors proposals for a DMP, the debt management company you choose to use will keep you informed regarding the progress of negotiations on all of these matters.

Should you decide to enter a DMP there are some practical housekeeping steps you will have to take to ensure the process runs smoothly. One of these is that you will almost certainly have to open a new bank account. Most people nowadays have their wages or salary or benefits paid into a bank or building society from which they have also taken out loans such as an overdraft or a credit card or a personal loan. This can be quite messy when the DMP commences, since your existing bank or building society may seek to use all of your wages or salary or benefits to address the deficits in your accounts with them, to the disadvantage of your other creditors. In these circumstances, it is better to open a new bank account with a bank or building society that is not connected to your existing bank or to any of your existing debts. You need to ensure that your wages or salary or benefits are paid into your new account and that your priority payments such as your mortgage, rent, council tax and car HP are made from your new account, setting up new direct debits as necessary. These steps will ensure that you remain in control of your income and that all of your creditors are treated on a fair and equitable basis. It is essential as well to cancel in writing (with your old bank or building society) all direct debits in relation to the unsecured debts that are being entered into your new DMP.

Entering a DMP is not free unless you choose to administer it your self. If you engage the services of a debt management firm, you will have fees to pay. These fees vary from one firm to another. Most firms charge a set up fee equal to the debtor’s first monthly payment into the DMP and retain this payment to cover the set up costs. This means of course that creditors receive nothing for the first month that the DMP runs. Thereafter, ongoing management charges are usually a fixed percentage of the monthly payment made by the debtor. The average monthly charge is 15% with a minimum of around £25 and a maximum of around £100. As you shop around, you will find that ongoing charges vary from one firm to another. Here is a typical example of how fees may be charged. Let us suppose that the debtor enters a DMP and agrees to make monthly payments of £300. The DMP firm retains the first payment of £300 in respect of set up fees. Thereafter, it charges £45 per month and distributes the remaining £255 to the debtor’s creditors on a pro-rata basis.

Entering a DMP will clearly affect your credit rating. Of course your credit rating may already be affected if you currently have arrears or a history of missed payments or late payments. When you enter your DMP you begin to make reduced monthly payments to your creditors as negotiated and agreed between you debt management firm and your creditors. Since this obviously means that you will no longer be making the contractual payments that you originally agreed with your creditors, records of these defaults may be made and probably will be made on your credit files. The credit reference agencies retain such records for six years.

Even if your circumstances should change while your DMP is up and running, because it is a flexible and informal process and not as rigid as other processes, your debt management firm can seek to agree a variation of your DMP with your creditors. Most DMP firms assign a liaison officer with specific responsibility for each debtor’s DMP and you should keep your contact person fully aware of your circumstances at all times and particularly in relation to any direct correspondence or to direct contact from your creditors or to any significant changes to your income and expenditure.

There are of course many alternatives courses of action other than a DMP that you might pursue if you find yourself facing financial difficulty. You should be aware of all of your options before you decide which way to go. Some of the most common alternatives are Bankruptcy, Individual Voluntary Arrangement, Debt Relief Order, Debt Consolidation, Asset Sale & Debt Settlement and Property Remortgage & Debt Settlement. It may even be that financial assistance is available from family or friends. The final piece of advice in this article and possibly the most important one is to please seek out and obtain independent advice if your finances are troubling you.