Debt Management: Lesser Known Insolvency Options
Are you aware of all the debt management solutions open to you? How do you decide which one is best for your needs?
There exists a lingering belief that bankruptcy is the only real solution to extreme debt. In fact, bankruptcy is generally recommended as a last possible resort. Those who declare bankruptcy must sign over the majority of their money and assets. On top of this, bankruptcy affects credit score and it isn’t private in nature.
Other lesser known debt management options may offer a better alternative. An individual’s eligibility for an alternative debt management option depends on a number of factors, including location, employment status, debt owed, and assets owned by the borrower. To get a clear idea of the various available options and which is most suitable, it is best to consult a debt management professional. They have expert knowledge and use modern insolvency software to reach a practical solution.
Current personal debt situation in the UK
The first thing to be aware of is that personal debt is not a rare problem in the UK. According to The Money Charity, the average British household has a personal debt of £54,952. The Office for Budget Responsibility indicates that this average household debt is expected to rise to £94,481 by 2021. By the end of July 2016, outstanding customer credit lending was an incredible £186.6 billion. The Citizens Advice Bureaux in England and Wales deals with 4,495 debt-related problems every working day and 18 properties are repossessed every single day.
Clearly, the problem is a pressing one and those affected need to know their options.
County Court Administration Orders
For those with a High Court or County Court judgement against them, an administration order is a means of dealing with debt that can’t be paid in full. As part of an administration order, the debtor will make a single monthly payment to their local court. This payment is divided up among their creditors, who will be unable to take further legal action without court permission. If payments are not kept up, the court will cancel the order.
To qualify for an administration order, the total debt must be less than £5,000. To obtain an administration order, the applicant needs to visit the court and fill out an application. The court will then decide how much debt needs to be repaid, as well as a suitable monthly repayment amount. Orders remain on credit reports six years from the commencement of the order, as is the case with any financial decision. This is so lenders can get an accurate, up-to-date reflection of a loan applicant’s reliability and spending habits.
Debt Relief Orders (DROs)
A DRO is generally regarded as a low-cost alternative to bankruptcy. A DRO is usually organised by an authorised debt adviser. Individuals may be eligible for a DRO if they owe less than £20,000, don’t have much in the way of assets, own a home and don’t have much disposable income. Another necessity is a history of living and working in England and Wales for the past three years.
With a DRO, creditors can’t recover their money without court permission. DROs last approximately the same amount of time as a bankruptcy and individuals will be discharged from their debts a year following the commencement of the DRO. Unfortunately, DROs pose much the same restrictions as a bankruptcy. People with a DRO won’t be able to borrow more than £3,500 without informing the lender of the DRO, they won’t be able to act as the director of a company, and they will need to disclose their debt situation when opening a bank or building society account.
Individual Voluntary Arrangements (IVA)
IVAs are a formal, legally-binding debt management option. An insolvency practitioner will act as an intermediary to set the terms of the IVA, and they will often utilise IVA software to ensure that all their clients are receiving the best service possible.
With an IVA, the applicant and their insolvency practitioner make an agreement with all relevant creditors to repay all, or part, of the debt in question. This agreement will depend on several factors, such as the amount owed and the financial situation of the borrower. The borrower makes monthly payments to the insolvency practitioner, who then divides up the sum between the lenders. By its nature, an IVA offers the applicant more control over their assets than most other debt relief options.
With an IVA, contact between the applicant and the creditors stops and creditors will be unable to take further legal action. However, if the monthly payments are not maintained, the insolvency practitioner may be duty bound to cancel the IVA. Many people choose an IVA because any remaining debt is written off when the IVA is complete.
Debt Management Plans (DMP)
A DMP is an informal, non-legally binding agreement wherein all debt is repaid. The idea is to calculate a realistic and achievable repayment schedule. Unlike an IVA, all debt is repaid with a DMP, but its informal nature means that any party can back out at any time.
As with similar debt management solutions, the debtor makes a single monthly payment is made, which is divided up between the relevant lenders. A DMP can either be informal, organised by an individual and their creditors, or there’s the option to get a third party involved in the form of a licensed debt management professional.
A DMP could be suitable if the debt is large and unsecured. Creditors may be willing to agree to a DMP if the alternative is bankruptcy. Most lenders are aware that, in some cases, a DMP represents the best chance of recovering their money.
Debt management solutions are complex, so borrows should seek advice from a qualified expert. Look for a professional who has invested in intuitive, up-to-date insolvency software.