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Guide: Debt Solutions

According to the Trade Union Congress (TUC), every household in the UK owes an average of £15,385 to banks, credit firms, and other lending institutions. The TUC believes that low incomes, insecure jobs, and poor financial management are the key driving forces of households’ debts. Sadly, big lending corporations are taking advantage of the vulnerability of UK workers to rake huge profits. The government, on its side, hasn’t done enough to level the ground for unions to negotiate employees’ pays with the employers. As such, most employees are forced to rely on overdrafts and credit cards to carter for their recurrent expenditures. So, the question is, what are the other alternatives to help you deal with your debt problems? Because as it stands, you have to work your solution to maintain manageable debt statuses. In this article, we take an in-depth look at some debt solutions available to UK residents. They include Individual Voluntary Arrangements, Debt Management Plans, Debt Relief Orders, and Bankruptcy. How Does an IVA Work? For an IVA to be legally binding, the set-up must be officiated by a professional, who, in this case, is known as an insolvency practitioner. This can either be an accountant or a lawyer. Based on the amount you owe the creditor, an insolvency practitioner determines and charges the appropriate fees. After doing all the paperwork, the insolvency practitioner takes charge of all the debt management on your behalf. The Criteria for an IVA For it to be legally binding, an IVA must meet the following measures: The unsecured debt must amount to at least £6,000 You must owe at debts to at least two creditors Your incomes must not comprise of benefits only You must be able to pay the IVA fees according to your ability, as well as your debt size. What Types of Debts Does a IVA Cover? IVA doesn’t cover all types of debts. So as a UK resident, it is critical to know what’s included, as well as the exceptions. Take a look at some of the debts that you can cover through IVA: Insurance and income tax arrears Personal loans Credit cards Water, gas, and electricity bills Overdrafts Payday credits Personal loans On the flip side, IVA does not cover the following categories of debts: Student loans Child support arrears Maintenance arrears (unless ordered by a court) Social fund loans Pros and Cons of an IVA Pros: IVA is legally binding hence you don’t have to worry about creditors taking further legal actions against you An IVA allows you to make single monthly payments according to your financial ability You won’t incur any additional interests or penalties once you make the agreement Other than yourself, only the creditors and the insolvency practitioner will know about the deal Provided you make the monthly repayments, an IVA has fixed end date Cons: An IVA is not entirely fixed; if your financial proceeds improve, you’ll consequently have to pay more Defaulting the payments could bring you back to your original debt position You’ll have to live on a strict budget as any extra earning goes to the payments An IVA affects your credit rating for up to 6 years Debt Management Plans (DMP) A DMP is a deal between you and your creditors to make a one-set monthly payment of your non-proprity debts and is arranged through a company who will manage the repayments. Non-priority debts are the less urgent ones whose default may not lead to dire consequences. They include benefits credit cards, payments from friends, loans, and so on. The fact that a DMP is not legally binding gives you the freedom to cancel it anytime, and it doesn’t have a fixed end date. How Does a DMP Work? As we already stated above, a DMP only provides debt solutions for non-priority debts. So before deciding on this plan, ensure that you sort out all your priority debts first. After clearing the priority debts, you need to look for a DMP provider who does the set-up for you. Please note that some DMP providers offer their services freely while others charge. So, you can choose your preferred option based on your budget. The DMP provider helps you work out the budget and determine the time it would take to clear your debts. The provider also leads the negotiations between you and the creditors to come up with a sensible solution. The DMP provider negotiates with your creditors in a bid to reduce the monthly payments and interest rates. They also convince the creditors to waive or reduce any penalties. The Criteria for a DMP A debt management plan must meet the following minimum requirements: You must truthfully answer questions that touch on all areas of your income The DMP provider must evaluate your financial position, and if your cash flow is negative, they must offer a DMP You must work on a budget proposal with your provider and send it to your creditors for approval or rejection Both the creditors and the DMP provider must send you monthly statements for the confirmation of the payments Pros and Cons of a DMP Pros: Creditors stop bothering you with calls Timely payments improve your credit scores as time goes You’re able to make a realistic financial goal and a monthly budget All the interests and late payment penalties may be frozen or reduced A DMP offers credit card consolidation Cons: More extended repayment periods (36 to 60 months) You may bear restrictions of applying for additional credit Late payments amount to cut on such benefits as reduced debts and lowered interest rates Debt Relief Orders (DRO) DROs are directives that prevent the creditors from forcing you to pay your debts if you’re a low-income earner and own few assets. The creditor temporarily freezes your debts for 12 months. If your financial position will not have changed by then, the creditor writes off the debts ultimately. The types of debts covered (and not covered) under DRO are similar to those which apply in an IVA. How do DROs Work? The DRO set-up must be done by a special advisor known as an approved intermediary. The intermediary assesses your position, and if they agree that a DRO is right for you, they make the application on your behalf. The approved intermediary then sends your application to an official receiver (a government official who processes the order). If you qualify for a DRO, your creditors will have no right to take legal actions against you. However, you must convince them that your financial situation doesn’t allow you to clear the debts. The Criteria for a DRO You must meet specific standards for you to qualify for a DRO. They include: Permanent inability to pay your debts Your total assets must be worth £1,000 or less At the time of application, your total debts must amount for £20,000 or less You must be a resident of England, Wales, or Northern Ireland You must not have applied for a DRO within the past six years Your total savings for each month must not exceed £50 Pros and Cons of DRO Pros: There’s no court process It includes a broad scope of debts There’s no stress of a creditor taking actions against you Cons: It affects your credit score It only includes non-secured debts Your details appear in the Individual Insolvency Register Bankruptcy Deciding to go bankrupt is the last option that you can think of in a bid to clear your debts. If you feel you’re no longer in a capacity to pay back your debts due to circumstances better known by you, you can apply for bankruptcy. The decision to go bankrupt can’t necessarily come from you. Your creditor may decide to seek the help of a court to make you bankrupt, with or without your will. The Criteria for Bankruptcy For you to apply for bankruptcy, you must meet the following minimum requirements: You must present a bankruptcy petition to the court You must owe and be unable to pay a debt of at least £5,000 If applied by a creditor, they must have given the debtors a statutory demand requiring them to pay off their debts within 21 days There must be a trustee in bankruptcy to handle your affairs after the court issues a bankruptcy order Pros and Cons of Bankruptcy Pros: No more pressure of dealing with the creditors You may keep some essential property whose values are less than £2,000 You’ll still be receiving a considerable income You won’t need to pay the debts covered in the bankruptcy Cons: High-income earners will have to make payments towards the debt for three years You will have to lose some of your property It might cause a close to your business Bankruptcy restrictions might bar you from traveling or emigrating Final Thoughts Getting into debt is a part of life. Sometimes it might be the only option we have to survive; don’t blame yourself for that. The step that we take to manage or clear the debts is what matters. We hope that these four debt solutions will help you make sound financial decisions going forward.