If you find yourself deep in debt, there are seven main options which you can consider to address your predicament. In England, Wales and Northern Ireland, about 98% of people who decide to do something about their personal debt problems opt for one of these seven courses of action. Which solution appeals to you? Which solution are you eligible to go for? See if your circumstances match any of them.
County Court Administration Order
An Administration Order is a solution only open to people with debts totaling no more than £5,000 which is owed to at least two creditors. It is a little known and rarely used solution and given the involvement of the court, may not be attractive to some people. There is one other pre-condition before you can avail of this solution and that is that you must have a county court judgment entered against you by one of your creditors that you cannot pay in full. If you are eligible, you can ask the court to make a County Court Administration Order, known as a CCAO. Under such an order you make weekly, monthly or quarterly payments to the court, which shares the funds among your creditors in proportion to the amounts you owe to them. If your debts are greater than £5,000, you can rule out this course of action immediately.
Debt Relief Order
A Debt Relief Order or DRO is a solution aimed towards insolvent people who have disposable income of no more than £50 per month, who own assets of no more than £1,000 (apart from a car which can be worth up to £1,000) and who have unsecured debts not exceeding £20,000 in total. You can apply for a Debt Relief Order to be made without having to go to court. There is a fee of £90 for a DRO that needs to be made before you can apply. If your DRO is granted, your debts will be cleared in twelve months, without you having to make any further payments. Your credit rating will of course be adversely affected if you take out a DRO. If your debts are greater than £20,000 or if you don’t comply with the rules on assets or disposable income, you will not be able to do a DRO.
Self Administered Debt Management Plan
The Self Administered Debt Management PLan or DMP is a sort of do it yourself debt solution. In this type of plan you contact all of your creditors yourself and explain that you are unable to service your debts. You work out the total amount that you can afford to repay each month and then offer each creditor a percentage of that sum, according to the size of each debt. For example, if you owe your biggest creditor 50% of your total debts, then you offer that creditor 50% of the total amount available to you for repayment. And so on for your smaller creditors. You do all the negotiations with creditors yourself without the assistance of a third party. The idea is that each creditor will be repaid on a ‘pro-rata’ basis, the fairest way to make repayments. As part of your negotiations with each creditor you try to get them to freeze interest, penalties and any other charges on your debt to them. Entering into such a DMP is likely to impair your credit rating.
Debt Management Company
A Debt Management Plan with a company is very similar to the above solution, except that you engage the services of a debt management company to negotiate with your creditors on your behalf and to manage your payments to them. One benefit is that you do not have to deal with your creditors yourself but rather that you can avail of the expertise of the debt management company to do that. They may be more successful than yourself in getting your creditors to agree to interest and penalties being stopped or frozen on your debts. However you may have to pay a fee to the debt management company for their services. On top of that your credit rating will be adversely affected although it may already have been impaired if you had been defaulting on payments before your DMP commenced.
Getting a consolidation loan is another sort of ‘do it yourself’ solution. You go to a lender and borrow enough money to pay off all of your creditors leaving you with just one repayment to make every month. One downside to availing of a consolidation loan is that the term of the loan can be very long, particularly if the monthly repayment is to be significantly less than the sum of the repayments of the various smaller loans which it has repaid and replaced. Your credit rating should not be adversely affected by your taking out a consolidation loan, provided you have not previously defaulted on any of your old loans and you keep up the repayments on the new loan. One thing to watch out for is that the consolidation loan provider may insist on securing the loan on your property, if you own property, and the interest rate you pay may be considerably greater than what you might expect to pay on a run of the mill mortgage.
IVA (Individual Voluntary Arrangement)
The Individual Voluntary Arrangement or IVA is one of the ‘big two’ solutions and is quite a popular solution for insolvent people. It has overtaken bankruptcy in terms of the numbers of people availing of it in England and Wales. In fact in the last quarter (April to June 2014) almost three times as many people in England and Wales opted for an IVA as opted for bankruptcy. To go into an IVA, you must have a regular income or own some assets or both or have access to third party funds. You must also by law engage the services of an insolvency practitioner, who will charge fees, to prepare, negotiate and administer an IVA for you in which you voluntarily repay your creditors some (occasionally all) of the monies you owe them. In an IVA, you are at less risk of losing your house, if you have one, than you would be in bankruptcy. Most IVAs have a term of five years and at the end of the IVA, the remaining balance of your unsecured debts is written off. Your credit rating is of course impaired when you enter an IVA and this impairment can last for a year after a five year IVA completes. After this time, your credit rating will begin to repair.
If none of the six solutions above are suitable for your circumstances, then the seventh option may appeal to you, provided you are insolvent. This is bankruptcy, sometimes called ‘the last resort’ for an insolvent person. Bankruptcy can be initiated by you or indeed by a creditor with whom you have an outstanding debt of at least £750. Your assets are sold and you may also have to make payments from your surplus income for up to three years, to help clear your debts.
In bankruptcy you are likely to lose your house, if you have one and your credit rating is affected adversely in a similar way as it is in an IVA. The so-called stigma of bankruptcy does not seem to be perceived as negatively as it was in the past but it still remains a major barrier for many people. However the number of bankruptcies in England and Wales has been dropping steadily for years now from a peak of almost 75,000 in 2009 to just less than 25,000 in 2013.
Each solution has some merit but they are all different. Your best option will depend on your own personal preference, your current and future financial and personal circumstances and those of your family. Your debts, your income and your assets will also have a major bearing on which options, if any, may be available to you. To help you to decide, you should look up the website of The Insolvency Service where you can find a publication entitled ‘In Debt – Dealing with your Creditors’. This provides a detailed summary of the pros and cons of each solution and it compares and contrasts the various solutions with each other. It also provides contact details for various government funded advice agencies where you may obtain free advice.