When personal insolvency is staring you in the face, the decision as to which solution to go for is a major one. Even after taking the best advice available, it still boils down to your own personal choice in the end.
The advice you obtain will spell out the pros and cons of each of the three financial solutions that are most frequently chosen by insolvent persons. These are Bankruptcy, often described as the last resort option, an IVA, seen as a relatively new solution although IVAs have actually been about for over twenty seven years now and a Debt Management Plan which is quite an informal process but used by a lot of people for addressing debt problems.
Are you insolvent?
Of course, your personal financial circumstances may be such that you do not need to avail of any of these three options. In the first instance you may not be insolvent at all. YOu might just need to reorganise your personal finances so that you match your monthly spend to your income by, for example, tightening the purse strings and living within your means.
If you are insolvent; i.e. unable to pay debts as they fall due, you may have assets such as a house or car that you are able and willing to sell in order to raise the necessary funds to address or clear your debts or to atleast reduce your debts to manageable levels. If you are unwilling to sell your property, you may be able to restructure your mortgage and release some funds which you can then use to pay off some or all of your debts.
Even if you have no such assets, your family (spouse, parent, sibling or other relative) or one of your personal friends may be able and willing to advance funds to you, enabling you to address your debts straightaway while giving you ample time to repay them in an affordable and sustainable way while charging little or no interest. Most people however do not have a family or friends with both the resources and a sufficiently generous disposition to provide financial assistance in this way. Even if you were fortunate enough to have such a friend or relative, would you be prepared to swallow your pride by disclosing your financial predicament to them and then seeking their help with the risk that they might be unwilling to help you?
While you may have no assets that you can sell and no friends or family able and willing to help you, there are some lesser known solutions which might apply to your situation. You could for example obtain a consolidation loan which would need to be large enough to pay off all your debts and have just one monthly repayment to make. A downside is that lenders of consolidation loans may seek to secure such a loan on your property and while the monthly payments may be lower than you are currently paying, you might find that the term has been considerably extended. Consolidation is sometimes described as being a solution which simply ‘pushes the can down the road’ and may not be a real solution if you are in fact insolvent.
Another solution that may apply to you is a Debt Relief Order (DRO). To qualify for a DRO, your debts must be less than £20,000 and while you may own a car valued at up to £1,000, your other assets must not exceed £1,000 and your disposable income must not be greater than £50 per month.
The last of the lesser known solutions is a court based procedure called an Administration Order but it can only be granted if your debts are no more than £5,000 and one or more of your creditors has obtained a court judgment against you. In a nutshell the court makes an ‘Administration’ order based on what you can afford to pay, usually on a monthly basis.
Assuming none of these lesser known solutions apply to you or you are not inclined to avail of any of them, then your options narrow down to the three big solutions identified at the start of this article i.e. Bankruptcy, IVA or Debt Management. It is best to speak to a professional advisor to find out which of these is the right solution for you. In some cases you should contact more than one advice provider to ensure that not only do you get the best advice but the full range of options that are open to you are adequately explored and researched before you make your mind up.
For many people, the stigma of bankruptcy is still a major impediment to going down that route and if ruled out the choice is then between an IVA and Debt Management. Key factors to be considered in finding out which is right for you 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.
IVA and Debt Management Comparison
For example, suppose that your debts amount to £30,000 and your disposable income is just £275 per month. In an IVA lasting five years (the normal duration for most IVAs), you would contribute 60 monthly payments of £275, a total of £16,500 and this would cover the costs of the IVA and the dividend to creditors. The remaining £13,500 of debt would be written off on completion of the IVA. One more year after completion and your credit file would begin to be repaired.
If instead you opted for Debt Management instead, the full amount of the debt would have to be repaid and at £275 per month, that would take at least nine years and two months. This is assuming all of your creditors agreed to freeze interests, penalties and other charges, which in a Debt Management Plan cannot be tguaranteed, given the lack of legislation governing the process. While the full debt is ultimately repaid, the repair of your credit file would be at least ten years away.
So, in this scenario a Debt Management Plan is not nearly as attractive for the debtor as an IVA and it does not have the full weight of the law behind it. Certainly, if the projected duration of the DMP is five years or more, then the debtor should fully explore and consider the IVA option. A reputable advisor or 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.