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IVAs, Bankruptcy and Debt Management Explained - Which Debt Solution Is Best For You
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Bankruptcy, debt management, IVAs explained
Individual Voluntary Arrangements, debt programmes, being bankrupt - what's the difference? And how will they affect me?
It's trouble time. According to debt advice charities delays in mortgage repayments and repossessions are up to record levels.
Your probably reading this because you've found yourself in a bit or alot of debt trouble.
Well it's a good thing that you've recognised it early. The later you recognise you're in debt the worse problem it is.
The first bit of advice offered by one of the charities, Credit Action, is don't go and borrow more and more, but start dealing with the problem right away. Have a look at the tips for getting out of debt on this personal debts site.
Three avenues to consider are the following:
Start a debt management plan
In short a plan to get out of debt in a more informal way and without tarnishing your credit record.
Discuss and arrange an individual voluntary agreement
Your creditors need to be spoken with. An ignored creditor is an angry creditor and will be less susceptible to your charms when you lay them on thick. And you may just need to be negotiating with them sooner or later.
Declaring myself bankcrupt?
Investigate the unpalatable but look-at-it-anyway,-early, concept of declaring yourself bankrupt. If you can understand the processes involved with bankruptcy, and get yourself familiar with the way things work. You may find it a moral boost to your debt reducing marathon, to know that there is life after bankruptcy. And that there are many people living happy, if impecunious lives, after having been bankrupt. And that quite a few of them go on to work their way right back up to the top again. (Although that won't be in the armed forces etc!).
But first try to get yourself out of debt.
Charities you can approach are the following:
- Consumer Credit Counselling Service 0800 138 1111, www.cccs.co.uk
- National Debtline 0808 808 4000, www.nationaldebtline.co.uk
- and your local Citizens Advice Bureau, www.citizensadvice.org.uk
Charities, however, tend to be understaffed and overburdened by peoples debt problems which means that they can sometimes be quite tardy with their responses, all the while your debt problems may be increasing.
Independent debt companies and professional debt advisers can sometimes be of much greater help in having the incentive and time to treat your individual situation in a more appropriate manner than any catch all solutions.
They can have the infrastructure to handle your case personally including responding to creditors letters, acting on court orders and papers, and dealing with negotiations for you.
Debt companies charge fees, however. It is important for you to clearly establish at the outset what these fees are going to be and decide how they are to be paid. They are likely to try to claim much upfront given your situation, or they are likely to arrange another means of payment. The important part is for you to establish what these conditions are going to be.
Debt Management Plans
A debt management plan is an informal arrangement.
Once you've sorted out your personal budget and have an idea of what you can afford to spend on non essential living costs, then distribute this excess cash wisely. Don't necessarily pay off the most insistent creditors first, but rather prioritise those that are important to your future wellbeing. Mortgage or rent, gas, electricity, water and the bare minimum of food are the important ones. Look to reduce these bills by using comparison sites and changing suppliers, but keep yourself in a situation where you won't be cut off from essentials.
Establish what payments you can afford to pay these creditors and look to settle the more important ones as a priority. Negotiate on the phone and in writing with these creditors letting them know the situation and that you will continue to pay the debt but over a longer period. Creditors can often freeze interest payments on their debts which can at least stop them building more.
Negotiations can often be difficult, and creditors unwilling to make them. And any agreements you do make will not be binding and creditors are not compelled to accept them. So county court action may still happen. Probably more likely with the debts that you considered least important to your wellbeing.
You will need to repay all the debts but as long as both sides keep to their bargain, it won't necessarily impact on your credit rating or have further repercussions on e.g. your occupation.
Individual Voluntary Arrangements (IVA)
An Individual Voluntary Arrangement, (sometimes known as an Individual Voluntary Agreement IVA) is a more formal arrangement than the debt management plan. Useful to some but not necessarily all people in debt.
An individual voluntary arrangement is an agreement to a formal proposal to repay only a part of the debt that you owe to a creditor. Sometimes it may be only 20p for every £ that you owe, though most creditors are more likely to ask for much nearer the whole and usually over 50%. It is for you to negotiate according to your real ability to pay. Once the agreement is made, you are legally obliged to pay and the creditor is legally bound by the agreement too. The reason the creditors are usually accepting of this type of agreement is that they judge the likelihood of your bankruptcy and decide that any money is better than no money.
This IVA agreement can only be made through a licensed insolvency practitioner who will also invoice their fees. Fees are generally about 15% of the total amount paid to creditors which on the face of it makes their incentive to encourage you to pay more to the creditors, however these fees can be and are often capped at £10,000, or may be agreed separately.
An IvA is typically a 5 year agreement. Before the five years is up, a debtor will be expected to remortgage their property as the creditor has a right to any equity built up during the IVA period - that is, assuming that the value of your property has increased rather than decreased. There can be an extension of another year if the agreed debts aren't then paid off.
No further interest or charges can be added once the agreement has been reached, though your name will be listed on the insolvency register.
If your finances improve during the 5 year period, there is a chance that you can end up paying more than 100% of the original debt.
Bankruptcy
Yes! Bankruptcy! Take some time to consider it.
Declaring yourself bankrupt is a drastic step and although less and less, there is still stigma attached to the label. Without risk there is less chance of reward and the higher the risks the higher the chances of loss, so whilst society encourages risks and celebrates resulting success, it should also not stigmatise its alter ego. It should be considered at face value as a way to clear off debts. However, the social impact should not be underestimated. The label affects many aspects of your life. Many jobs, including those handling money, will not be available to you, nor will joining the army or becoming a lawyer. This list is not exclusive but is perhaps not as limiting as you might at first think.
It is an option when you no longer have any assets of any substance and have not disposed of any in the last 5 years. It is also an option if you have negative equity but little or no surplus income after reasonable living costs and there is no likeliness of this changing in the near future.
Filing for bankruptcy will cost approximately £500 and may be instigated by a creditor, though they will have to pay in order to start it. All your debts can be written off as part of the bankruptcy, but you will not be allowed to have more than £500 credit during the period of the bankruptcy order. Also you will be restricted in the type of bank account you will be able to run.
A bankruptcy order, however, may only last a year or so before you are discharged.
Consider bankruptcy, but as a last resort. You lose everything.
. . . . but only for a while.