Options available for dealing with debt

Debt Consolidation

If an individual retains a good credit rating and can demonstrate capacity to afford repayment, in some instances the best option is to avoid an insolvency event and consolidate all debts into one loan.  A good of example of this is when an individual has a number of high interest credit cards.  They should consider applying for a balance transfer credit card with zero interest and transferring their balances from their interest bearing cards.  This can reduce the monthly payments substantially.  However, it is important to bear in mind that the balances should be cleared before the interest free period expires, or they will find themselves back to square one.

Debt Relief Order (DRO)

A Debt Relief Order is suitable for anyone whose debt is below £20,000, who doesn’t own their own home, who has no savings or significant assets, no motor vehicle with a value in excess of £1,000 and has little or no surplus income.  If you are eligible for a DRO, you don’t have to make payments to your creditors and the debts will be written off.  However, there are stringent conditions to be met to ensure eligibility. An approved intermediary will manage this process and deals with your creditors on your behalf.  You are subject to a DRO for 12 months- after which time you are released from the debts.  However, before you choose to go down this route, you should be aware that the DRO will be recorded on your credit history for a period of 6 years.

Individual Voluntary Arrangement (IVA)

In our experience, it is the case that debt consolidation and/or a DRO is not feasible in most circumstances. This is due to either due to poor credit history or the level of debt (i.e. that in excess of £20,000).  In these instances, another option is to put forward an IVA to unsecured creditors.  An IVA is a formal and legally binding agreement between an individual and their creditors to pay back a certain percentage (or all) of the debt over a period of time (generally 5 years).  It can be funded from either monthly contributions from income, asset sales or third party funds.  Three quarters of your creditors voting on the proposal have to accept the IVA.  One of the key benefits of an IVA is that- unlike a bankruptcy scenario- is that an individual can retain control of their assets. At the end of IVA you are released from your debts.  Like a DRO, an IVA remains on your credit file for 6 years from the date it is registered.

Bankruptcy

When a resolution cannot be met with creditors, an individual may decide to either: (i) petition for their own bankruptcy or (ii) wait until a creditor takes a bankruptcy action against them.  Regardless of who initiates the bankruptcy action, the outcome remains the same.  In order to dispel any myths surrounding it, we emphasise that bankruptcy isn’t a permanent situation and in most instances you would obtain an automatic release from bankruptcy in 12 months. You are then released from your debts.  However, your assets are frozen and remain frozen until a solution has been reached with your Trustee in Bankruptcy.  If you hold any assets of excess value and have surplus income, these can be used to facilitate a repayment back to your unsecured creditors.  A bankrupt individual does not retain control of assets, so therefore bankruptcy comes with a degree of uncertainty.  The bankruptcy order will remain on their credit file from 6 years from the date of the order being made.