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Debt Solutions

Formal debt resolution tools

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Amy | Edited by Johanna

Updated August 2017

If you have extreme debts, a formal debt solution – bankruptcy, individual voluntary arrangement or debt relief order may be the only way back. It's not a step to be taken lightly, and you should ALWAYS seek debt advice first.

This guide acts as a reference, helping you to decode all the confusing language surrounding ways to deal with debt and help you find the right solution.

This is the first incarnation of this guide. Please suggest any changes or questions in the Debt Solutions discussion.

Are you in debt crisis?

The most important thing is not to panic. In years of talking to people about their finances and debt problems, Martin says he's never come across one problem that hasn't had a solution.

But before you continue reading, if you haven't already, read the Debt Problems guide. If you can sort out your debts without one of these formal solutions, it's much better to do that.

This guide's here for information only – to explain to you what the different formal debt solutions are. Always, always get professional debt advice before taking any of these steps.

It's safe to assume you're in debt crisis if:

  • You're struggling to pay all basic outgoings, eg, mortgage, rent, energy bills and credit card minimums, or
  • Your debts (excluding your mortgage) are bigger than a year's income after tax.

If this is you, there are solutions to help you. Here we'll cover debt management plans, administration orders, debt relief orders, individual voluntary arrangements, and bankruptcy.

Which solution, if any, is best for you will depend on your circumstances, so take the time to read through the information on the schemes designed to help you. And – we'll say it again – always, always take debt advice before doing anything. They're there to help, not judge. Try StepChange, Citizens Advice and National Debtline.

What is a debt management plan?

A debt management plan (DMP) is an agreement between you and your creditors to pay your debts. You make regular payments to a licensed debt management company, the company then shares this money out between your creditors.

This is the least serious of the debt solutions explained in this guide, as it's the only one that doesn't go through the courts. DMPs rely on you having spare cash to repay your creditors, and for them to accept that they'll get their money over a longer period than set out in your credit agreement.

  • You don't need to pay a fee for a debt management plan

    Some debt management companies will charge you a set-up fee and a handling fee each time you make a payment, but you don't need to pay these.

    StepChange Debt Charity and Payplan can arrange a fee-free debt management plan for you, meaning every penny that you send will go towards repaying your debts.

  • You make single monthly payments

    Usually, you make a single monthly payment to your debt management company, and it divides it among those you owe money to – taking the stress out of dealing with your creditors.

    It's a good way to show your creditors you're committed to repaying your debts and gives you peace of mind that they're being paid every month.

  • A debt management plan is not legally binding

    Unlike some of the other debt arrangements, a DMP is not legally binding and you can cancel it at any point.

  • None of your debts are written off

    Unlike some of the formal solutions, a debt management plan requires you to pay off all your debts. Usually, creditors will freeze interest while you're on a DMP, but they don't have to.

  • They're only for unsecured debts

    Debt management plans can only be used to pay 'unsecured' debts, for example, debts that haven't been guaranteed against your property.

Quick question:

If I'm already paying for a DMP can I switch to one of the free debt advice charities?

Report your debt management plan experiences in the Debt solutions discussion.

What is an administration order?

If you live in England, Wales or Northern Ireland, and have a county court or high court judgment against you, which you can't pay in full, an administration order is a way to deal with the debt. It's a repayment plan arranged by your local county court for debts of less than £5,000.

You'll have to make one payment a month to your local court which is then divided between your creditors – of which there must be at least two.

How an administration order works

You don't have to pay an upfront fee to set up an administration order (AO), but the court will take a handling fee of 10p out of every £1 you repay (to a maximum of £500).

To apply, download the application for an administration order (N92) form, and return it to your local court.

If your application is accepted, you make one payment to the court each month. This payment is an amount you're able to afford after paying for all your essential bills. The court then pays this to your creditors on your behalf.

Once you have the order, your creditors can't contact you for payment or add any more interest onto the amount you owe.

The administration order will last until you've paid your debts in full. However, if you can only afford a small amount towards your debts you can apply for a 'composition order', which costs £15. This sets a date for the administration order to end and when you reach this date your creditors will write off any remaining debt.

However, the court will only consider this if your payment won't clear the debts in a reasonable amount of time.

Quick questions:

I'm in Scotland, what rules apply for me?

Will an administration order affect my credit rating?

What happens if I can't keep up with the payments?

What happens once I've paid off the administration order?

Report your administration orders experiences in the Debt solutions discussion.

What is a debt relief order?

Debt relief orders (DROs) are specifically aimed at people on low incomes with debts of less than £20,000. A DRO freezes your debt repayments and interest for 12 months, and if your financial situation hasn't changed at the end of this time, then your debts are written off.

It's granted by the Insolvency Service and it's a cheaper option than going bankrupt.

To apply, you mustn't have assets (savings, shares, car, property) worth more than £1,000. And after essential living expenses, you can't have more than £50 left over from your income/benefits each month. If you do, you won't be granted a DRO.

It's worth noting that not all debts will be included in the DRO. While credit cards, overdrafts, loans, rent, council tax, utilities and benefit overpayments will be included, court fines, child support payments, student loans and social fund loans won't be – you'll still have to pay these.

How to apply for a DRO

You can get a DRO through one of the organisations approved by the Insolvency Service called 'Competent Authorities'.

The Insolvency Service will also appoint an Official Receiver for you, which is the person who administers your DRO.

You'll have to pay a fee of £90 to apply for a DRO, which can be paid in cash at a Payzone outlet over a six-month period. The Official Receiver won't consider your application until you have paid it all.

Once the application is received and you've paid the fee, the Official Receiver can make the order as long as you meet all the conditions. Be aware that it's an offence to give false or misleading information on your application.

Once your DRO has been approved you shouldn't have to pay any of the creditors listed on the order. Your creditors will be told about the DRO and you'll be protected from them taking any action.

Your debt relief order will be published on the public Individual Insolvency Register, where it'll remain for 15 months.

Quick questions:

I have debts I forgot about, can I include them after?

Will a DRO affect my credit rating?

Are there any restrictions on what I can do while I have a DRO?

What if my financial circumstances change?

How many times can I apply for a DRO?

What is an individual voluntary arrangement?

An individual voluntary arrangement (IVA) is a legally binding agreement that usually lasts for five or six years. Your current, multiple debt repayments will be combined into one monthly payment, which is distributed between your creditors.

So far, so debt management plan. But the IVA differs in that it's a formal arrangement. And as such, any debts remaining at the end of your IVA will be written off, and you get to start with a clean slate.

You can't set an IVA up on your own. You'll need the help of an Insolvency Practitioner – usually an authorised accountant or solicitor, who'll look at your situation and do a deal with the creditors. After the IVA's up and running it's their job to supervise it. But – you will pay for this; IVA costs can be £5,000 to £8,000. Why so much?

Any amount of debt can be included in an IVA, there are no limits set by the law, but your creditors won't normally agree to an IVA unless your total debts are more than £10,000. To be accepted, you need to have a stable income as you pay towards your debts during the life of the IVA. But its advantage over bankruptcy is that you'll usually get to keep your car and house (though you'll probably be asked to remortgage to release equity).

Not all debts can be brought into an IVA. The main ones that can are:

  • Overdrafts
  • Personal loans
  • Credit card and store cards
  • Catalogue debts

You're also allowed to include tax or VAT owed to HM Revenue & Customs (HMRC), but be aware that this may be given priority when payments are shared out.

You can't include mortgages, secured loans, rent, council tax arrears, court or parking/speeding fines or child support arrears so you'll need to include these when you work out your budget with your Insolvency Practitioner. They will also take all your essential living expenses into account so you'll only pay what you can afford towards your debts.

If you have no equity, or are in negative equity (ie, you owe more than the property is worth) at the start of the IVA, your creditors may demand that the home is revalued in the fourth year. After that, you may have to give up a proportion of the equity you then have.

How to set up an IVA

This isn't something you can do on your own – an Insolvency Practitioner needs to do it for you. They'll look at your assets and income and work out how much you can afford to pay as a lump sum and how much in monthly payments.

StepChange has a free Debt Remedy tool, it'll take you about 20 minutes to complete, but will help you decide if an IVA is right for you.

Otherwise, go to a free professional debt advice charity. It'll help you ensure an IVA is right for you, and be able to recommend local Insolvency Practitioners.

Once you've appointed an Insolvency Practitioner, they'll put together a proposal to show to your creditors; you'll be asked to sign this to confirm it's the best offer you can make.

To decide whether the IVA goes ahead, a creditors' meeting is called and a vote is taken. Creditors representing at least 75% of your total debts need to vote in favour of the IVA for it to go ahead.

Once the IVA is approved, creditors are unable to take any separate legal action to recover the debt. You pay a fee for the IVA, but it's included as part of the original monthly repayment when the proposal is agreed, so it's not like you need to find extra cash.

Once a year, the IP reviews your finances and an annual progress report is sent to you and your creditors. Your IVA will be added to the Individual Insolvency Register. It's removed three months after it ends. However, it'll stay on your credit reference agency file for much longer.

Quick questions:

I'm in Scotland, so can't get an IVA. What's there for me?

I've been granted an interim order on my IVA. What's that?

I have savings and a car, do I get to keep those?

I have a pension, will this be affected?

What if my financial circumstances change?

Will an IVA affect my credit file?

How do I choose an IVA provider?

What is an interlocking IVA?

Report your individual voluntary arrangements experiences in the Debt solutions discussion.

Bankruptcy – the last resort

Bankruptcy will have a serious effect on your life and should be seen as a last resort. Make sure you've considered all other alternatives and received professional debt advice before you even think about going ahead with bankruptcy.

Bankruptcy is a form of insolvency, which means your unsecured debts must be more than your assets (property, vehicles, etc) for it to be considered.

If you live in England or Wales you have to apply online to the Insolvency Service to become bankrupt. This will cost £680, and you'll be able to pay in instalments of as little as £5 if you can't pay upfront.

In Northern Ireland and Scotland the process for bankruptcy works slightly differently so you'll need to follow the steps depending on where you live.

The other possibility is that your creditors apply to have a bankruptcy order declared against you, if they can prove you owe at least £5,000. This is also issued by the court – and not all courts do bankruptcy hearings – use the court finder to find your nearest.

If you're declared bankrupt, there's several things that the law doesn't allow you to do – these are the bankruptcy restrictions. Break them, and your bankruptcy could last longer. They include:

  • Borrowing more than £500 without telling the lender you're bankrupt
  • Acting as a director of a company
  • Creating, managing or promoting a company without the court's permission
  • Managing a business with a different name without telling people you do business with you're bankrupt
  • Working as an insolvency practitioner (an authorised debt specialist)

The restrictions will last for 12 months from the date the court made you bankrupt, but they can be extended if you're careless or dishonest behaviour caused your bankruptcy, for example, you tried to hide assets or you got credit using false information.

What happens to my finances when I'm made bankrupt?

Once the court's granted your bankruptcy, you'll be assigned to a 'trustee'. This is the person appointed to manage your bankruptcy. They'll either be an Official Receiver – an officer of the bankruptcy court, or an insolvency practitioner – an authorised debt specialist.

  • You'll need to sell any assets you own. You'll likely have to sell your home, and any other assets that you own, to pay off as much of your debt as you possibly can. If you rent, check your tenancy agreement, as some landlords won't let to bankrupts.

    What will I have to sell?

  • You'll need to hand over any spare income. If you have spare income after meeting essential living costs, you'll also have to pay this over to your bankruptcy trustee, who will distribute it among your creditors. This arrangement, called an income payment agreement (IPA), can last up to three years, even if your bankruptcy only lasts one.

  • Your bank accounts will be frozen. You'll have to give the Official Receiver your bank cards, cheque books and credit cards. Your accounts will be frozen, but your trustee may release any money you need urgently, for example to buy food or your partner's share of any money in a joint account. It's also likely your bank will close your account.

What happens after the bankruptcy's over?

You'll be deemed bankrupt until you're discharged, at which time any restrictions placed on you will end. It's at this point the debts declared under the bankruptcy are written off. This will usually be 12 months after the court made you bankrupt, but it could be longer if you break any of the restrictions.

Being discharged from your bankruptcy is automatic, but if you want proof you can ask the official receiver for a confirmation letter which won't cost you a penny. Alternatively, you can ask the court for a Certificate of discharge, but this will cost £70 (plus £5 for extra copies).

If you're discharged early you'll be sent a Notice of early discharge. This can happen if the Official Receiver finishes looking into your affairs and your creditors don't object.

Quick questions:

What will happen to my pension?

Can I stop or delay the sale of my home?

What happens if I want to cancel my bankruptcy?

Do I still have to pay my student loan?

Can I get joint bankruptcy?

What will happen to my credit rating?

I live in Scotland, can I apply for bankruptcy?

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