WAYS OF DEALING WITH DEBT – a basic guide
If you’re struggling financially, there are various debt solutions available to help you deal with your debts. This guide summarises the options available, gives details of how each of them works, and explains the ‘pros’ and ‘cons’ of each.
Debt solutions at a glance
Individual Negotiated Debt Debt County Court Debt Relief Bankruptcy Voluntary agreement reorganisation / Management Administration Order (DRO) Arrangement with consolidation Plan (DMP) Order (CCAO) (IVA) creditors loan Will I be YES (when NO NO NO NO (unless the YES (debts YES (debts automatically you have court makes an are are free of the completed the order for this) discharged at discharged at debt? terms of the the end of the the end of the IVA) DRO, subject bankruptcy, to certain subject to exceptions. certain But you will exceptions. still have to But you will repay any still have to debts that are repay any not allowed in debts that are a DRO – listed not allowed in later) bankruptcy – listed later) Is it YES (but only NO Only on creditors Only on YES Only on YES automatically if it is accepted who are repaid in creditors who creditors binding on all by creditors full are repaid in included in my unsecured who are owed full your creditors? 75% or more application of your form unsecured debts, and who vote on your proposal) Is there YES NO You are only NO YES YES YES automatic protected from protection creditors repaid in from action by full my unsecured creditors? Is there NO NO NO NO NO NO NO protection from action by my secured creditors? How long will it Usually 5 No fixed No fixed time No fixed time Until the last Usually 1 year Usually 1 year last? years, if time payment is made (but you may making have to make contributions payments from surplus from your income. (A income for up lump sum or to 3 years) ‘full & final’ IVA may be shorter) Will it affect Possibly Probably Probably not Probably not Probably not Possibly Possibly my not employment? Is my home at NO (but if NO (but NO (but you need NO (but you NO (but you need Not applicable YES (but this risk? there is equity you need to to keep up with need to keep to keep up with (because may be in your keep up your up with your your mortgage or homeowners avoided if your property, you with your mortgage/rent mortgage or rent payments) don’t qualify spouse, may need to mortgage payments, which rent payments) for DRO) partner, or a try to release or rent may be more relative can some of it to payments) difficult unless buy your pay into your you take out a share of the IVA. If secured loan) net worth of applicable, this your home)
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will be covered in your IVA Proposal. If you can’t release equity, you will generally have to make up to 12 further monthly payments of your surplus income into your IVA instead.
Is there a NO NO NO NO Only available if Only available No minimum minimum or your total debts are if your total debt level if maximum £5,000 or less debts are no you are amount owed? (with at least one more than petitioning for judgment debt) £20,000 (or your own £15,000 in bankruptcy Northern (but £5,000 Ireland), minimum debt subject to level if a exceptions – creditor is listed later petitioning for your bankruptcy) What types of ANY (but in ANY ANY ANY ANY ANY (with ANY (with unsecured practice, debts certain certain debts are that are exceptions exceptions allowed? excluded in such as fines, such as fines, bankruptcy are student loans, student loans, usually and and excluded from maintenance maintenance IVAs too – see payments) payments) right) Will my credit YES YES POSSIBLY YES YES YES YES rating be affected?
Debt Solutions explained
Individual Voluntary Arrangement (IVA)
How it works
You go to an Insolvency Practitioner who will prepare, negotiate and administer an arrangement for you to voluntarily repay your creditors. This may be done by using your spare income, a lump sum, or other assets you own.
If you have surplus income after covering your essential household and personal expenses, or assets that can be used to pay your creditors, or access to a lump sum (for example from a relative), you may consider entering an Individual Voluntary Arrangement (IVA). Doing this will protect you from recovery action by your unsecured creditors, and will usually involve your creditors writing-off part of what you owe them. A proposal for an IVA will only be approved where enough creditors vote in favour.
The person you choose to supervise your IVA must be licensed and regulated under insolvency law as an Insolvency Practitioner.
The Insolvency Practitioner will charge fees for preparing, negotiating and administering your IVA. Before the Insolvency Practitioner offers to sign you up for an IVA, they should give you details of the fees they intend to charge, and how these must be paid – whether as a lump sum, or taken from the regular payments you make into the IVA.
Pros Cons Creditors who vote against your proposal are still bound by Your IVA will be entered on a public it. register. Creditors whose lending is unsecured can’t take any further The Insolvency Practitioner may require action against you. payment in advance for preparing your
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Interest is usually frozen, as long as you keep up with your proposal and getting your creditors’ agreed regular payments. agreement. Your Insolvency Practitioner will help you to prepare your If there is equity in your property, you proposal – including agreeing the level of your household may need to try to release some of it to and personal spending based on guidelines acceptable to pay into your IVA – normally via a re- creditors. mortgage or secured loan. If you can’t Many Insolvency Practitioners will allow you to pay their release equity, you will generally have to fees for preparing your proposal monthly, taken from your make up to 12 further monthly payments agreed IVA payment. of your surplus income into your IVA You make only one single regular payment each month or instead. quarter. Your Insolvency Practitioner is responsible for If your circumstances change, and your administering and distributing your payments to your Insolvency Practitioner can’t get your creditors. creditors to accept amended terms, your Your home is not at risk, as long as you comply with all the IVA is likely to fail. You will then still owe terms and conditions of the IVA. If there is equity in your your creditors the full amount of what you property you may need to try and release some of it to pay owed them at the start, less whatever has into your IVA – normally via a re-mortgage or secured loan. been paid to them under your IVA. For your protection there are strict guidelines on the amount If your IVA fails, you may be made of equity you can be asked to release, which will be set out in bankrupt. the IVA Proposal. If you can’t release equity, you will generally have to make up to 12 further monthly payments of your surplus income into your IVA instead. On completion of the IVA, the balance of what you owe to your unsecured creditors is written off. You may be able to continue running any business you have.
Negotiated Agreement With Creditors
How it works
You contact your creditors directly, and negotiate an agreement to repay all or some of what you owe them.
Negotiated agreements may involve either (or both) of these:
Payments from your income
Payments from lump sums you receive – for example from an inheritance, or from relatives. Your creditors may agree – at the start (or later) – to write off part of what you owe them. If they do so, they should confirm this agreement in writing.
Payments from income: you need to work out how much you can afford to repay, after covering your essential household and personal spending – such as mortgage/rent, heating, utilities and housekeeping. You should offer to share any surplus income among all your creditors, pro-rata based on the amounts you owe them. This means that all your creditors are offered their share of what you can afford. You should also ask your creditors to freeze any interest or charges, but this isn’t guaranteed. Your creditors will expect you to give them regular updates on your income and expenditure, so that they can see whether you can increase your payments.
Payments from lump sums: you may propose to make payments towards your debts from a lump sum you receive. Your creditors may agree to accept a lump sum in settlement of what you owe, and agree to write off the remainder of your debt. However, if you do also have surplus income after paying your everyday expenses, your creditors may expect you to make at least some payments from that as well.
If you can’t make payments temporarily – for example, due to short-term illness – your creditors may agree to accept no payments or token payments of just £1 a month. But they are only likely to accept this for a limited period.
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Pros Cons It is a fair and open way of sharing Your creditors may refuse to accept your proposal, although payments, which is widely understood they can’t refuse to accept any payments you make to them. If by creditors. they do refuse to accept your proposal, it’s always worth asking You can ask to reduce your them to reconsider. payments if your situation gets worse Your creditors may refuse to freeze interest and charges, but – or if you face unexpected essential you can always ask them to reconsider. spending. If you can only afford small payments, they may not even be You do not need an advice agency enough to cover interest and charges, and your debts will to negotiate these payments for you. increase. You can do it yourself, or ask an Your creditors may refuse your proposal if it hasn’t been advice agency for help with drawing prepared by an advice agency, which has independently up your personal budget sheet, and reviewed your circumstances. You can complain to the Office of make offers to your creditors based on Fair Trading (OFT) if this happens. this. You remain liable to repay the full amount of your debts. Your creditors may be prepared to However – depending on your circumstances – you may be able write off the balance of what you owe to persuade your creditors to agree to write off part (or even all) after a period of time if: of it. Unless they have specifically agreed not to, your creditors you have shown that you have could still take action against you – for example by getting a made every effort to pay them court judgment and then an order that creates a charge* on your back as much as you can; home. AND You are responsible for administering all the payments you have maintained the yourself, and keeping your creditors informed of your regular agreed payments to circumstances. them. *Having a charge on your home means that if you don’t repay the debt, the creditor has a claim on the proceeds if the property is sold.
Debt Reorganisation or Consolidation Loan
How it works
You apply to a lender for a loan to reorganise (or clear) your debts. These loans are often advertised as ‘consolidation loans’. This means you swap some or all of your creditors for just one creditor. If you own your home, the lender will probably want to take a charge* on it. You should seek independent advice about whether this would be in your best interests. You should shop around for the best deal from high street and internet lenders. If you have a poor credit rating, you may not be able to get loans on the best terms.
A consolidation loan will only help if:
it is used to repay some or all of your existing debts; AND the repayments on the new loan are no more than those you are already making towards your existing debts – and you can afford the new repayments.
Otherwise, the new loan will simply add to your debt burden and make your problems worse. You will also need to look very carefully at how long the loan will take to repay, what interest you are going to have to pay compared with what you are currently charged, and what charges or penalties there are – for example for late or missed payments.
*Having a charge on your home means that if you don’t repay the debt, the creditor has a claim on the proceeds if the property is sold.
Pros Cons You will be making one monthly You may have to pay fees for arranging the loan. Always ask for payment on one loan instead of full written details of all fees. many payments to different creditors. If you have a poor credit rating, you may not be able to get a Your monthly payments may be loan, or you may be offered poor terms and conditions – for lower, or at least should not be any example a high interest rate.
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Debt Management Plan (DMP)
How it works
You go to a debt management company who will negotiate with your creditors and manage your payments to them. The arrangement the company negotiates for you with your creditors is called a Debt Management Plan (DMP).
Your creditors will want details of all your assets – including your home, if you own it. This helps them decide whether the offer you make through the debt management company is reasonable, or whether they expect any of your assets to be sold so they get a larger payment.
The individual or company you choose to manage your plan must be authorised and regulated by the Financial Conduct Authority (FCA). Some will not charge you a direct fee for their services, but will get it from the creditors out of the payments you make. Others may make an initial charge for preparing, negotiating and administering your DMP, and then take the rest from your monthly payments before distributing the remainder to your creditors.
In either case, before it offers to sign you up for a DMP, the company should give you details of the fees it wants to charge, and how you must pay them.
A DMP can last for 5 years or much longer – depending on how much you owe and what you can pay each month. Your debt management company should give you an estimate of how long the plan will last. They should also review the plan every year – and your creditors will expect to be given regular updates of your income and spending, so they can see whether you can increase your payments. Pros Cons It is a fair and open way of sharing payments, The debt management company can’t force widely understood by creditors. creditors to accept your proposal or freeze interest. The debt management company will help you A DMP is not binding on creditors who refuse to prepare your plan, including agreeing the level of take part in it, but they can’t refuse to accept any your household and personal spending (based on payments made to them. acceptable guidelines), which can then be used to You remain liable to pay your debts until they are put your case to the creditors. repaid in full. The debt management company will negotiate Unless they have specifically agreed not to, your with your creditors on your behalf, so offers are creditors could still take action against you – for more likely to be accepted (and interest frozen) example by getting a court judgment and then an than if you try to do this yourself. order that creates a charge* on your home. You may be able to vary your payments if your You may not be able to make reduced offers if circumstances change. your circumstances worsen significantly and you You make regular single payments each month or can no longer afford your agreed regular quarter to the debt management company, which is payments. responsible for administering all payments to your A DMP can last for several years. However, some creditors. creditors may be prepared to freeze interest for only Any monthly payment you make should be a shorter time. If interest and charges aren’t frozen passed on to your creditors within 5 working days. for the full length of the DMP, the total amount you
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Some debt management companies do not end up paying under the plan could be more than charge you a fee. the original amount of your debts – and could Creditors may be prepared to write off the extend the duration of the DMP. balance of what you owe after a period of time if: *Having a charge on your home means that if you don’t repay the debt, the creditor has a claim on the proceeds if the property you have shown that you have made every is sold. effort to repay them as much as you can; AND you have maintained regular payments to the debt management company.
County Court Administration Order (CCAO)
How it works
You can ask the court to make an Administration Order if:
you owe a total of no more than £5,000 to at least 2 creditors; AND you have a court judgment entered against you by one of your creditors that you can’t pay in full.
Under the order, you must make weekly, monthly or quarterly payments from your income to the court, which shares them among your creditors in proportion to the amounts you owe them.
If you don’t keep up the payments, the court may make an Attachment of Earnings Order. This is sent to your employer, directing them to deduct amounts from your wages and pay them to the court for sharing among your creditors. Pros Cons None of the creditors listed on the Creditors can put objections to the court and ask to Administration Order application can take be left out of the order. The court doesn’t have to further action against you without the court’s agree to this. permission. If you don’t keep up with your payments, the order The court deals with the creditors and shares can be revoked (withdrawn) and the creditors can start out the payments for you. pursuing you again. Interest and other charges are stopped. If the court makes an Attachment of Earnings Order, There is no upfront fee – the court takes their your employer will find out about your money troubles. fee of 10p from every £1 you repay. You can apply to make payments for a limited time, such as 3 years, using a ‘Composition Order’. If your circumstances worsen, you can apply to the court to make reduced payments. You may be able to continue running any business you have.
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Debt Relief Order (DRO)
How it works
If a DRO is considered suitable, you will be referred to an Approved Intermediary*. They will check that you fit the criteria for DRO, help you complete the online form, and submit it for you to a government official called the Official Receiver. The Official Receiver then makes the order, if appropriate.
*An Approved Intermediary is someone who has been approved by a competent authority chosen by the government.
To get a DRO:
your qualifying debts must not exceed £20,000 (or £15,000 in Northern Ireland); AND your gross assets must not exceed £1,000 (or £300 in Northern Ireland) Certain assets do not count – for example clothing, furniture, and a vehicle worth less than £1,000); AND your surplus income must not exceed £50 a month after covering your essential personal and household spending.
A DRO will last for 1 year, and once your DRO has ended you are released from your debts (with certain exceptions). Pros Cons Your debts will be written off at the Your DRO will be entered on a public register. end of the DRO. There are a few You can’t have a DRO if exceptions, as explained opposite. you have an existing Bankruptcy Order; OR None of the creditors listed in the DRO you’re in an IVA; OR application can take further action you’re subject to bankruptcy restrictions; OR against you without the court’s you have had a DRO in the last 6 years. permission. You also won’t be able to have a DRO if you own a house, It allows you to make a fresh start even if it has no equity (value). after 1 year. You will remain liable to pay certain non-qualifying debts – in The fee (£90) is affordable and can be particular: paid in instalments – but the fee must student loans be paid before the DRO application can fines be made. debts arising from family proceedings You will keep your assets and a budgeting loans and crisis loans owed to the Social vehicle as detailed above. Fund The Approved Intermediary ensures Your employment may be affected. that you are given appropriate advice and that you fit the criteria for a DRO. Your arrangement could be revoked (withdrawn) if during your DRO: you don’t co-operate with the Official Receiver; AND/OR your surplus income increases to above £50 per month; AND/OR your gross assets exceed £1,000 (or £300 in Northern Ireland) You can’t act as a director of a company – or be involved in its management – unless the court agrees. You will be committing an offence if you get credit of £500 or more without disclosing that you are subject to a DRO. You may have a Debt Relief Restrictions Order* made against you for 2-15 years if you acted irresponsibly, recklessly or dishonestly.
*This places restrictions similar to those in force while subject to the DRO
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Bankruptcy
How it works
Bankruptcy is a formal court procedure which can be started by you, or by one or more of your creditors to whom you owe £5,000 or more.
Your assets (with certain exceptions) are sold to help repay your creditors. However, you can usually keep your personal belongings, the contents of your home, and your tools of trade (which may include your car) – unless they have a high value.
If you have surplus income after covering your essential household and personal expenses, you may also have to make payments out of your income for up to 3 years.
Your assets and income are dealt with by a licensed and regulated Insolvency Practitioner, or by a government official called the Official Receiver.
Bankruptcy usually lasts for 1 year – and once you have been freed (discharged) from your bankruptcy, you are released from your debts (with certain exceptions).
Pros Cons You can apply for bankruptcy online Your bankruptcy is entered on a public register and is (England & Wales only) advertised. Debts are written off, with certain If you apply to the court for your own bankruptcy, you will exceptions explained opposite. have to pay the relevant fees: Creditors can’t take further action In England & Wales, you pay an adjudicator fee of unless the debts are secured on your £130 and a deposit of £550 – so the total payable is home (or other property). £680. This can be paid by instalments, but the full fee It allows you to make a fresh start must be paid before submitting the bankruptcy after only 1 year. application (minimum instalment of £5). You may be able to avoid having to In Northern Ireland, you pay a court fee of £127, a sell your home if your spouse/partner or deposit of £525, and a solicitor fee of £7 –so the total a relative can buy your share of its payable is £659. value, after any debts secured on it You will remain liable to pay certain debts – in particular: have been repaid. student loans fines debts arising from family proceedings budgeting loans and crisis loans owed to the Social Fund Any business you have will almost certainly be closed down. Your home is likely to be sold – to realise your share of any equity for the benefit of your creditors. Your employment may be affected. Certain professionals are barred from practising if they are made bankrupt. You can’t act as a director of a company – or be involved in its management – unless the court agrees. You will be committing an offence if you get credit of £500 or more without disclosing that you are bankrupt. You may have a Bankruptcy Restrictions Order* made against you for 2-15 years if you acted irresponsibly, recklessly or dishonestly.
*This places restrictions similar to those in force while subject to the bankruptcy.
Version 4: April 2017
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