An Introductory Guide to the Options Available 

When considering the different options for a way out of your debt troubles it is important to understand that there is no superior option that is the out-and-out best choice.

Relieving yourself of a debt problem is a very personal business and the most suitable option for you to take will depend heavily upon your specific situation.

Each option has its own substantial list of advantages and disadvantages, here at WelcomeHome we are presenting the following information with the aim of helping you make the correct choice in picking the debt management option that is most suited to your (and your family’s) needs. 

We will be covering the five main options for dealing with debt respectively:

• Debt Management Plans
• Individual Voluntary Agreements (and Scottish Trust Deeds)
• County Court Administration Agreement
• Debt Consolidation
• Bankruptcy

Debt Management Plans

Debt management is an informal agreement between you and your creditors (the people that you owe money to).

It involves a Debt Management service assessing your financial circumstances and then working out what you can comfortably afford to pay. 

You then make one affordable monthly payment to your Debt Manager and they will distribute the money to your creditors. Your Debt Manager will also deal with your creditors for you, saving you from the daunting task, as well as the inconvenience, of dealing with individual creditors on your own. 

There is a good chance your creditor will accept a Debt Management Plan (DMP) because it means that they are, at least, getting some money from you each month rather than nothing at all. 

With an arrangement like this the creditor knows where they stand, how much they are going to receive and when they are going to receive it.

It therefore alleviates the uncertainty for the creditor along with the inconvenience of chasing you up.

Have a read of our Guide to Debt Management for a more in depth look at Debt Management Plans, including the pros and cons of this option.

 
Individual Voluntary Agreement (IVA)

An IVA is a legally binding agreement between you and your creditors. It allows you to make affordable monthly payments for a reasonable period of time (usually 5 years) with any remaining debt written off at the end of that period.

What’s in it for the creditors? 

It may come as a surprise then that the creditors would be happy to accept an agreement that could result in them writing off a large chunk of what they are owed.

Especially when you consider the fact that, depending on your circumstances, the arrangement can result in the writing off of up to 65% of your debts!

The reason that they are often willing to enter the agreement is, of course, not a charitable one. It is, in fact, likely to be in their favour as much as it is in yours, as the creditor will receive more money back through the IVA payment than they would if they pushed for your bankruptcy. 


How do you go about setting up an IVA?

The formal nature of an IVA dictates that it must be set up by a licensed professional called an Insolvency Practitioner.

A debt adviser will often offer the service of a full financial review for free to see if an IVA would be the best solution for you.

Have a read of our Guide to Debt Management for a more in depth look at IVAs, including the pros and cons of this option.


Scottish Trust Deeds

A Protected Trust Deed is a legally binding voluntary arrangement, available only in Scotland, which is similar to an IVA and aims to resolve debt problems by offering debtors an alternative to sequestration (bankruptcy in Scotland).

In principal then, a Trust Deed is the equivalent to an IVA for Scottish residents. They do though vary slightly to IVAs in that most of them only last for 3 years, as opposed to 5.

Although considered an "informal" bankruptcy, a Trust Deed is still regulated by The Scottish Bankruptcy Act 1985.

County Court Administration Order

An administration order can be requested if you have at least one judgement, at least two creditors, your total debts are no more than £5,000, and you are finding it difficult to organise your payments.

The administration order, if granted, will allow you to pay off all of your debts with either monthly or weekly payments to the court. This option gives you freedom from interest and protection against further action from your creditors.

Administration orders do though have their drawbacks, a fee must be paid for this option and the order will be entered on the Register of County Court Judgements making it difficult for you to get credit until you have cleared all your debts.

Debt Consolidation

Consolidating your debts involves borrowing money, and creating new debt, to repay your existing debt. This option is viable because the payments on the new loan will be less than you are currently paying towards clearing your existing debts.

The problem with these new lower payments though is that your term of repayment can be increased dramatically, along with your total repayment amount.

Things to be wary of:

• Debt consolidation companies who push for you to take out their additional insurance policies to accompany the loan. While certain cover is necessary and highly advisable, you will almost certainly get it cheaper if you buy it separately rather than bundled in.
• Not fully understanding the implications and not being able to access new borrowing at a low rate of interest can lead to worsening debt and sometimes even potential homelessness. It is vital that you are aware of the downsides if you are considering debt consolidation.
• Profit maximising debt management companies who are more concerned with their balance sheet than ensuring that a consolidation loan is right for you.
• The seemingly kind-hearted companies that offer a service regardless of the state of your credit rating. The interest rates can be astronomical.
• High interest debt consolidation loans secured on your property, companies may push this option as it is win-win for the lender. Repayment means that they benefit from the higher interest charges, and if you default, they can repossess your home and get their money back early.

Bankruptcy

For many people bankruptcy will end up being the cheapest way to resolve their debt situation. Making yourself bankrupt at the local County Court costs around £500. It is though a public affair and will not be kept confidential.

Once bankrupt, you are under the control of the bankruptcy trustee. They will arrange to sell items of value belonging to you (including your house if the sale value is more than your mortgage debt) and will want to discuss what regular payments you can make.

Bankruptcy can result in your exclusion from certain occupations and if this is the case IVAs and other alternative solutions would probably be better suited to you.

Bankruptcy tends to be a valid option for those with few assets and unaffordable debts as it will give you legal protection and limit the period over which you will be repaying. If you stand to lose your job or valuable assets another option may be far more suitable to you.

And you must remember to be careful, once under control of the trustee they have the right to look into your financial conduct, with regard to selling things or ‘giving things away’, prior to your bankruptcy. Any dubious findings will be investigated.