If figures from the national money education charity, Credit Action, are to be believed Britain is rapidly sinking into a mire of personal debt. According to them the total level of personal indebtedness in The UK is rapidly approaching £1.5trillion (in July 2010 it stood at £1,456billion), or to put it another way, UK individuals now owe more than the country as a whole produces in a year. Not only is our personal debt increasing, but more and more of us are struggling to meet our personal liabilities, Citizens Advice sees 9,000 new free debt advice cases every single day.
For many personal bankruptcy seems like the only option, a course of action that whilst it does mean your debt can be wiped clean in as little as a year, can for some lead to unemployment, the loss of a home, and in some cases long term inability to obtain credit. So what are the alternatives?
Individual Voluntary Arrangements (IVAs): Individual Voluntary Arrangements are a form of legally binding agreement between an individual and their creditors. The aim of an Individual Voluntary Arrangement is to agree a formal arrangement between an individual and their creditors, for the individual to make, and stick to, reduced monthly repayments, based on what they can afford, rather than the amount owed by them. In return all creditors will agree to cease all further legal action to recover the debt, as long as the terms of the arrangement are met by the debtor. Because an Individual Voluntary Arrangement is a legally binding agreement, and comes under the legislation of the Insolvency Act, it must be setup and managed by a licensed Insolvency Practitioner (IP). The IP must secure agreement from three quarters, in value, of the individuals creditors for the Individual Voluntary Arrangement to come into effect.
An IVA typically lasts for 5 years, and as long as the debtor maintains their payments, when the Individual Voluntary Arrangement is concluded they will be free from any outstanding debt. Non payment may lead to further legal action, and probably result in bankruptcy for the individual.
The aim of an IVA is for the individual to repay what they can now afford, rather than what they were contractually obliged to pay under the original loan, credit card, and finance agreements they had. They are also not made public as bankruptcies are, and so afford some privacy, and do not require employers to be informed or place restrictions on company directors, or professional qualifications. However an IVA is only an option if you have at least £15,000 in unsecured debts, and after completion of the Individual Voluntary Arrangement it will show on your credit file for up to six years so you will probably struggle to obtain credit for up to 11 years from the date of taking the Individual Voluntary Arrangement out. As a legally binding agreement it is advisable to gather as much IVA information as possible and seek professional advice as early as you can, to asses if this is a suitable option for your circumstances.
Debt Relief Orders (DROs): A Debt Relief Order is an agreement that offers similar legal protection to an IVA but for relatively low amounts of debt. To qualify for a DRO an individual should be a non-homeowner, with less than £300 in assets, and a low income with no more than £50 a month considered as disposable. The order gives protection from creditors for 12 months and does not involve any element of repayment.
Debt Management Plans (DMPs): A Debt Management Plan is an informal agreement, and as such can take many forms. In essence a DMP involves negotiation with creditors to agree some form of reduced payment plan, and if possible the freezing of interest. There are a number of specialist providers, and charities who can help setup a debt management plan on your behalf.
Less scrupulous Debt Management companies may offer guarantees that interest, charges and legal action will be stopped by entering into a debt management plan, however in reality a Debt Management Plan is an informal arrangement and so can guarantee no such legal protection for the debtor. However in many cases creditors will be flexible in order to guarantee some form of repayment.
Most debt management companies will often make significant charges to setup a DMP, often retaining the first one, two, or more monthly payments you make under the plan, as well as an ongoing management charge which is often a percentage of the monthly payment you make.
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