Coping with Personal Debt
Nowadays, most people suffer from individual finance challenges. Almost everyone would like to do something concerning them, preferably to make them disappear. There are various answers to difficulties of personal financial distress available. The issue is where and when to start. We want to discover how great our troubles are and assess our situation on a scale of one to ten. A rating of one could be a condition of being prosperous and comfortable with ten being in a state of ‘hopeless’ personal financial distress. But remember that there is always hope! Especially in the UK where enlightened legislation and the ‘fresh start’ approach to debt promises much more than hope. There are actually solid other solutions that the fiscally burdened person can go after, in spite of the seriousness of individual indebtedness.
The four principal options or approaches when facing a personal debt crisis are Debt Consolidation, Debt Management, Individual Voluntary Arrangement and Bankruptcy. The first two of these options, Debt Consolidation and Debt Management, would normally be availed of by people who, strictly speaking, are not technically insolvent but may have considerable difficulty in managing their finances. On the scale of one to ten, their problems would rate as a six or less. The second two options are for people who are clearly insolvent with problems at the upper end of the scale ranging from about five to ten. Each approach has its advantages and disadvantages. It makes sense to consider them all before deciding which of them to employ. It also makes sense to take advice from one of the charity debt advice bodies such as the CCCS or from one or more of the commercial insolvency advice firms before making a final decision. Let’s look at each option briefly in turn.
Debt consolidation depends on receiving a new loan that you simply apply to instantly clear all your other consumer debts. Consequently, you simply must make one regular monthly pay back of the consolidation loan. These payments should be within your means. There are various types of consolidation loans. They can be unsecured or they can be guaranteed on your property. If you merge all your outstanding debts this way you’ve got to be confident that your personal unsecured debts are incorporated and that you can afford to come up with the regular repayments for the full duration of the consolidation loan, that can easily be longer in comparison with any of the terms of your current borrowings. You need to keep from acquiring any further borrowing as long as you’re paying off the consolidation loan. Consider that with this option you will be controlling your own debt problems and working one-on-one with your own creditors. There are many disadvantages in going the debt consolidation path but if you are able to answer yes to each of the following questions, then it may be a possible option for you.
Do I have a regular income? Do I have a reasonable level of disposable income i.e. the amount of income left over when I have paid my rent or mortgage, car HP, living expenses (including food, fuel, clothing, transport, energy, phone, council tax, insurances, car tax etc) for both myself and my dependents? Do I have a decent credit rating? Am I solvent?
Debt management involves making offers of repayments to your creditors based on what you can afford to pay back. Normally you would prepare a Debt Management Plan (DMP) which you present to your creditors and you seek to get their agreement to your proposed plan to repay your debts. You provide details of your income and expenditure and you show how you will distribute your disposable income to your creditors. Usually you will offer to repay each creditor in proportion to the size of the debt you owe to them. For example, if half of your debts are with one creditor, than you would pay half of your disposable income to that creditor and pay the other creditors on a similar proportionate basis. You do not need any professional assistance to establish a DMP but many debtors use the services of specialist DMP companies.
You need to remember that there isn’t any legislative basis for the control of DMPs and as a result it can be difficult to get all your lenders to accept your DMP proposal. Some creditors may agree to your DMP and some may not. Some may accept for a modest period of say six months. Some lenders may possibly decline to freeze interest and charges on your debts during the life of the DMP. Be aware that a DMP may go on for quite a few years, perhaps up to a decade. Finally a DMP does not give you any official protection from your lenders.
An Individual Voluntary Arrangement or IVA is a formal insolvency process and is an alternative to bankruptcy. In an IVA you enter an agreement with your creditors that you will repay a certain amount of your debt over a fixed period of time, usually five years. The term could be much shorter (as little as six months) if you can offer a cash lump sum to your creditors. The important point is that at least 75% of your creditors (measured by the amount of your debts to them) must accept your IVA proposal. This decision is taken at a meeting of your creditors and it is binding on all of your creditors, even those who chose not to vote for or against your proposal.
It should be stated that for an IVA to be proposed, you the debtor must be insolvent and the total of your unsecured debts would have to be at least 15,000. You need to have a regular source of income and have a reasonable amount of disposable income left over after taking into account your normal living expenses and the amount you need to keep back to service your secured debts such as your mortgage and car HP. This disposable income is the payment you make each month to your IVA and which is used to pay your unsecured creditors and to fund the administration costs of your IVA. By law, you must utilize the services of an Insolvency Practitioner or IP to assist in the IVA process. The IP’s charges are clearly stated in the proposal and these fees and costs are deducted from the monies you contribute to your IVA. There are no upfront fees to be paid and if your creditors do not approve your IVA proposal, you pay nothing to the IP.
If the IVA is approved by your lenders, your entire lenders must halt recovery measures against you and must, legally, stop all interest and charges. The IP takes on all communications with your creditors on your behalf and makes the payments to your creditors from the monies you pay into your IVA.
Bankruptcy is a formal insolvency procedure and is looked upon as a remedy of last resort. You can declare yourself bankrupt or one or more of your lenders may bankrupt you. Your local CAB can assist you in getting and lodging the mandatory papers in the court if you decide to bankrupt yourself, a procedure termed as a ‘Debtor’s Petition’. There are some fees and costs which you will need to pay yourself when lodging the documents. Right now these total less than 1,000. If the bankruptcy order is given by the court, power over your resources goes to an officer of the court, called the Official Receiver who will either handle your case or appoint an Insolvency Practitioner (who for this course of action has the title of Trustee) to manage your case. The Official Receiver/Trustee then looks into your financial situation to determine what you can do to settle your debts. If this is the first time you have been made bankrupt and if you co-operate completely with the Official Receiver/Trustee, you will be released from your bankruptcy within twelve months and any sums still due to your creditors must be cancelled by law.
Bankruptcy may well be the best solution for you if you have no assets, are not employed in a professional capacity and if you are on a low income. If you have a high income you may prefer debt consolidation, a debt management plan or an IVA instead but if you opt for bankruptcy you may be subject to an Income Payments Order for up to three years, notwithstanding the fact that you will be discharged from bankruptcy within twelve months. Remember though that the purpose of bankruptcy is to protect you from your creditors.
There are several some other remedies other than the big four described above such as Debt Relief Orders which apply to people whose total financial obligations are less than 15,000, who have no belongings and whose disposable income is less than 50 per month. Whatever you decide to do, take advice from capable advisors and try to stay clear of picking the first remedy recommended to you. It pays to shop around and consider all the solutions.
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