January 11, 2011
It is estimated that more than a million people have "problem debts" – as recession, rising unemployment and the credit crunch take their toll.
Many of these people will put their finances back on an even keel by careful budgeting. But those whose debts continue to spiral may have little option other than to consider one of the arrangements now available to help people escape their debts.
Television advertisements may make these options look like an easy way to wipe the slate clean. But some of the "solutions" advertised can saddle people with even larger debts in the long run.
Mark Sands, national head of bankruptcy at RSM Tenon, says: "There are a number of options, from an informal agreement with your bank to Individual Voluntary Arrangements (IVAs), a Debt Relief Order or filing for bankruptcy."
Here we list the pros and cons of each. Anyone in this position should seek independent advice, for example from a bank, credit card provider or debt counselling charity. Louise Brittain, the head of bankruptcy at Deloitte, said: "All licensed insolvency practitioners should give clients one hour's free consultation."
Debt Management Plan
This is an informal arrangement with your creditors, so it doesn't fall under the aegis of the Insolvency Act. On the upside, it means your name will not appear on the Insolvency Register, so theoretically your credit rating shouldn't be further impaired – although by the time you need to set up such a plan, your credit rating is likely to be shot to pieces anyway.
Ms Brittain says consumers should be wary of signing up to these plans, as they are unregulated and do not significantly reduce debts. Instead, an adviser negotiates repayment terms with creditors. If all agree, a payment plan is set up which can reduce the monthly repayments. Usually one payment is made to the debt management company, which then passes this money on to creditors – after deducting a fee.
The downside is that these plans rarely write off debt, nor freeze interest payments; usually they simply extend the credit term to reduce monthly payments, which may mean you pay far more in the long run. Ms Brittain says: "These are often the worst things you can do; you are simply delaying the whole process and people are still living with the stress of being in debt, often with no end in sight."
She says they are nevertheless favoured by credit card companies, as they don't need to make provision for the arrangements as "bad debt" on their balance sheet.
IVAs
These are formalised versions of a Debt Management Plan; provided that three-quarters of your creditors agree, the rest must abide by the terms of any repayment plan.
Most IVAs are five-year plans based on what you can afford to pay. Debt outstanding at the end of the period is written off. Mike Gerrard, of Grant Thornton, says: "Typically, debtors repay about 40p out of every £1 they owe under an IVA, so they are a way of getting on top of your finances."
But don't assume this means your credit card bills will be cut by this amount; as part of the IVA agreement you will have to realise any assets you own, be it savings, investments or your home.
Anyone opting for an IVA should remember that their name will still appear on the Insolvency Register – and it will stay there for the full five years. Their credit record is likely to be impaired for even longer.
Mr Gerrard says: "Rightly or wrongly, bankruptcy is a better option for many people, as it allows them to make a clean break and a fresh start, rather than having the millstone of unpaid debts around their neck for a further five years."
Bankruptcy
There is still a stigma attached to bankruptcy, but for many people it remains the only sensible option if debts have got seriously out of control. It is more expensive than an IVA, as those opting to declare themselves bankrupt – or being made bankrupt by a creditor – now have to pay £600 court fees (although those with debts of less than £15,000 and no substantial assets can apply for a Debt Relief Order, which works in much the same way, for just £90).
Once you have been declared bankrupt your assets come under the control of the court and will be divided between creditors. You will, however, be able to keep a modest car, your pension (in most circumstances) and "reasonable" living expenses.
At this point your debts are effectively written off. But shares, Isas, investments and your stake in any property will be sold to pay off your debts. If you jointly own property, it will usually be at least a year before the property is sold. Any spouse or partner will keep their share.
For the following year any windfall – be it an inheritance, a sudden promotion or even a lottery win – will be the property of your creditors. After 12 months you will be discharged and can start all over again.
However, for a further two years you will not be allowed to be a director of a limited company, and you will not be able to obtain credit without informing the lender that you are a discharged bankrupt.
Mr Sands says: "If you live in rented accommodation, have a fairly low-paid job – or are unemployed – and don't have significant savings, then you're unlikely to notice a significant difference, apart from the fact that you're no longer being hassled about credit card repayments. Even for those with property this may be a easier route than an IVA, as it allows them to make a fresh start."
The only real long-term effect of bankruptcy is that in future you will find it difficult to borrow at competitive rates. The following organisations provide advice for those with serious debt problems
- Citizens Advice - find nearest bureau in local phone book
- Consumer Credit Counselling Service 0800 138 1111
- National Debtline 0808 808 4000
- Christians Against Poverty 01274 760720
It is estimated that more than a million people have "problem debts" – as recession, rising unemployment and the credit crunch take their toll.
Many of these people will put their finances back on an even keel by careful budgeting. But those whose debts continue to spiral may have little option other than to consider one of the arrangements now available to help people escape their debts.
Television advertisements may make these options look like an easy way to wipe the slate clean. But some of the "solutions" advertised can saddle people with even larger debts in the long run.
Mark Sands, national head of bankruptcy at RSM Tenon, says: "There are a number of options, from an informal agreement with your bank to Individual Voluntary Arrangements (IVAs), a Debt Relief Order or filing for bankruptcy."
Here we list the pros and cons of each. Anyone in this position should seek independent advice, for example from a bank, credit card provider or debt counselling charity. Louise Brittain, the head of bankruptcy at Deloitte, said: "All licensed insolvency practitioners should give clients one hour's free consultation."
Debt Management Plan
This is an informal arrangement with your creditors, so it doesn't fall under the aegis of the Insolvency Act. On the upside, it means your name will not appear on the Insolvency Register, so theoretically your credit rating shouldn't be further impaired – although by the time you need to set up such a plan, your credit rating is likely to be shot to pieces anyway.
Ms Brittain says consumers should be wary of signing up to these plans, as they are unregulated and do not significantly reduce debts. Instead, an adviser negotiates repayment terms with creditors. If all agree, a payment plan is set up which can reduce the monthly repayments. Usually one payment is made to the debt management company, which then passes this money on to creditors – after deducting a fee.
The downside is that these plans rarely write off debt, nor freeze interest payments; usually they simply extend the credit term to reduce monthly payments, which may mean you pay far more in the long run. Ms Brittain says: "These are often the worst things you can do; you are simply delaying the whole process and people are still living with the stress of being in debt, often with no end in sight."
She says they are nevertheless favoured by credit card companies, as they don't need to make provision for the arrangements as "bad debt" on their balance sheet.
IVAs
These are formalised versions of a Debt Management Plan; provided that three-quarters of your creditors agree, the rest must abide by the terms of any repayment plan.
Most IVAs are five-year plans based on what you can afford to pay. Debt outstanding at the end of the period is written off. Mike Gerrard, of Grant Thornton, says: "Typically, debtors repay about 40p out of every £1 they owe under an IVA, so they are a way of getting on top of your finances."
But don't assume this means your credit card bills will be cut by this amount; as part of the IVA agreement you will have to realise any assets you own, be it savings, investments or your home.
Anyone opting for an IVA should remember that their name will still appear on the Insolvency Register – and it will stay there for the full five years. Their credit record is likely to be impaired for even longer.
Mr Gerrard says: "Rightly or wrongly, bankruptcy is a better option for many people, as it allows them to make a clean break and a fresh start, rather than having the millstone of unpaid debts around their neck for a further five years."
Bankruptcy
There is still a stigma attached to bankruptcy, but for many people it remains the only sensible option if debts have got seriously out of control. It is more expensive than an IVA, as those opting to declare themselves bankrupt – or being made bankrupt by a creditor – now have to pay £600 court fees (although those with debts of less than £15,000 and no substantial assets can apply for a Debt Relief Order, which works in much the same way, for just £90).
Once you have been declared bankrupt your assets come under the control of the court and will be divided between creditors. You will, however, be able to keep a modest car, your pension (in most circumstances) and "reasonable" living expenses.
At this point your debts are effectively written off. But shares, Isas, investments and your stake in any property will be sold to pay off your debts. If you jointly own property, it will usually be at least a year before the property is sold. Any spouse or partner will keep their share.
For the following year any windfall – be it an inheritance, a sudden promotion or even a lottery win – will be the property of your creditors. After 12 months you will be discharged and can start all over again.
However, for a further two years you will not be allowed to be a director of a limited company, and you will not be able to obtain credit without informing the lender that you are a discharged bankrupt.
Mr Sands says: "If you live in rented accommodation, have a fairly low-paid job – or are unemployed – and don't have significant savings, then you're unlikely to notice a significant difference, apart from the fact that you're no longer being hassled about credit card repayments. Even for those with property this may be a easier route than an IVA, as it allows them to make a fresh start."
The only real long-term effect of bankruptcy is that in future you will find it difficult to borrow at competitive rates. The following organisations provide advice for those with serious debt problems
- Citizens Advice - find nearest bureau in local phone book
- Consumer Credit Counselling Service 0800 138 1111
- National Debtline 0808 808 4000
- Christians Against Poverty 01274 760720
Closed November 2010
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