Debt Solutions Guide

Welcome

Thank you for talking to us about your current financial situation and as we discussed there are several options available which will help you make arrangements with your creditors.

To assist you in choosing the most appropriate option for your circumstances we have provided a guide explaining the options available to you. This guide explains these options, how they work and some of the pros and cons of each.

Please use this guide together with other information we have sent to you such as the ‘Additional Information for Debt Management Plans’ and the letter detailing the results of the financial review we have carried out on your behalf.

What is the most appropriate option?

The most appropriate option will depend on your current and future financial circumstances. By completing our Fact Find and providing us with documentation which regards to your circumstances we are able to discuss your options with you. In view of this it is important that you provide us with a full disclosure of your financial situation in order that we can make recommendations to you.

 

Debt Solutions explained

 

1.Negotiated agreement with creditors

 

How it works

You contact your creditors and negotiate an agreement to repay all or some of the debts. This may be payments from your disposable income or from any lump sum you may receive (e.g. from relatives who may wish to assist you)

Should you wish to negotiate with your creditors based on your disposable income you need to work out how much you can afford to repay, after allowing for your essential household expenditure and personal spending such as mortgage or rent, heating, utilities, and housekeeping. The majority of creditors will provide you with a form that will assist you with this.

You should offer to share any extra income among all your creditors, based on the amounts you owe them. This means that all your creditors are offered their share of what you can afford. You should also ask your creditors to freeze any interest or charges. Your creditors will expect you to give them regular updates of your income and expenditure so that they can see whether you can increase your payments.

Your creditors may be prepared, at the start or later, to agree to write off part of what you owe them. If they do so, they should confirm this agreement in writing.

If a lump sum is made available to you, your creditors may agree may agree to accept a reduced settlement of what you owe – that is, they agree to write off a proportion of the balance they are owed. However, if you do have extra income after paying your everyday expenses, they may expect you to make at least some payments from that as well.

If you can’t make payments temporarily, for example because of a short-term illness, creditors may agree to accept no payments or token payments of say £1 a month, but only for a limited period.

Pros

  • Fair and open way of sharing payments, widely understood by creditors.
  • You can ask if you can reduce your payments if your situation gets worse or you face unexpected essential spending.
  • You do not need an advice agency to negotiate these payments for you. You can do it yourself or ask an advice agency for help with drawing up your personal budget sheet and make offers to your creditors based on this.
  • Creditors may be prepared to write off the balance of what you owe after a period of time if:
    • you have shown that you have made every effort to pay them back as much as you can, and
    • you have maintained regular payments to them.

Cons

  • Creditors may refuse to agree with what you propose (but it’s always worth asking them to reconsider) although they can’t refuse any payments you make to them.
  • Creditors may refuse to freeze interest or charges (but it’s worth asking them to reconsider).
  • If you can only afford small payments, they may not be enough even to cover interest or charges, and your debts will increase.
  • Creditors may refuse your proposal unless it’s made through an advice agency, which will have independently reviewed your circumstances. You can make a formal complaint if this happens.
  • Creditors could still take action against you, for example by getting a court judgment and then an order that creates a charge on your home, unless they have specifically agreed not to do so in return for the payments made under the informal arrangement.

You are responsible for administering all the payments yourself and keeping creditors informed of your circumstances.

2. Debt consolidation loan

 

How it works

You apply to a lender for a loan to consolidate your debts. This means you swap some or all of your creditors for just one creditor.

If you own your home, the lender may wish to take a charge on it to secure the debt. My Payment Plan is not qualified to provide you with independent financial advice with regards to the most appropriate loan solutions that may be available to you. With your permission, we are able to pass your details to a broker who will search the lending market for you .

Alternatively you can seek your own independent advice or you can do your own search of High Street and internet lenders. If you have a poor credit rating, you may not be able to obtain a loan and if you do it may not be at the lowest interest rates.

Please remember that your home is at risk if you fail to pay on time any payments to loans secured on it.

A consolidation loan will only normally help if it reduces your repayments. If it increases your payments it will increase your debt burden and possibly make the debt position worse.

Pros

  • You will be making one monthly payment on one loan rather than many payments to different creditors.
  • Your monthly payments may be lower, or at least should not be any higher.

Cons

  • You may have to pay fees for arranging the loan. Always ask for full written details of all fees.
  • If you have a poor credit rating, you may not be able to get a loan or you may be offered poor terms and conditions, for example a high interest rate.
  • If the loan is secured on your house or other asset, then it could be taken from you (repossessed) if you do not keep up the payments.
  • Interest rates often change over the loan period, making it difficult to work out what the total cost of the loan will be – check if the interest rate is fixed or variable.
  • Consolidation loans are often offered over a longer period of time than your original debts. This means that even if the interest seems reasonable, the length of time you have to repay it can increase the overall cost of the loan significantly, so you end up paying more.
  • If you don’t clear all your existing borrowing, the new loan is likely to make your debt problems worse and make it more difficult for you to make all your payments.

3. Debt Management Plan (DMP)

 

How it works

A Debt Management Plan (DMP) is where a company will negotiate with your creditors and manage payments to them on your behalf.

The debt management company will provide your creditors with details of your income & expenditure and your assets in order that they can decide whether the offer made to them on your behalf is reasonable or whether they expect any of your assets to be sold so that they get a larger payment.

The individual or company you choose to manage your plan must be licensed and regulated by the Financial Conduct Authority. A debt management company should give you details of the fees it wants to charge you, and how you must pay them. A plan can last for 5 years or more, depending on how much you owe and what you can pay each month or week. Your debt management company should give you an estimate of how long the plan will last. They will also review the plan every year, and creditors will expect to be given regular updates of your income and spending so they can see whether you can increase your payments.

Pros

  • Fair and open way of sharing payments, widely understood by creditors.
  • The debt management company will assist you with the preparations of your financial statement to present to your creditors including agreeing the level of your household and personal spending based on guidelines.
  • The debt management company will negotiate with creditors on your behalf, so offers are more likely to be accepted and interest frozen than if you try to do this
  • You may be able to vary your payments if your circumstances change.
  • You can make payments weekly or monthly to the debt management company, which is responsible for administering all payments to your creditors.
  • Any monthly payment you make should be passed on to creditors within 5 working days.(every 4 weeks if you pay weekly)
  • Creditors may be prepared to write off the balance of what you owe after a period of time if:
    • you have shown that you have made every effort to repay them as much as you can; and
    • you have maintained regular payments to the debt management company.

Cons

  • The debt management company can’t force creditors to accept your proposal or freeze interest. A plan is not binding on creditors who refuse to take part in it, but they can’t refuse to accept any payments made to them.
  • You remain liable to pay your debts until they are paid in full.
  • Creditors could still take enforcement action against you, for example by getting a county court judgment and then a charging order, which creates a charge on your home, even if you are keeping up your payments under the plan.
  • You may not be able to make reduced offers if your circumstances worsen and you can no longer afford your agreed monthly payments.
  • A plan can last for several years. However, some creditors may be prepared to freeze interest for only a shorter time. If interest and charges cannot be frozen for the full length of the plan, then the total amount you end up paying under the plan could be more than the original amount of your debts, and could extend the lifetime of the plan.
  • Having a charge on your home means that if you don’t repay the debt, the creditor has a claim on the proceeds if the property is sold.

4. County Court Administration order (CCAO)

 

How it works

You can ask the court to make an administration order if:

  • you owe no more than £5,000 to at least 2 creditors; and
  • you have a court judgment entered against you by one of your creditors that you can’t pay in full.

Under the order, you must make weekly, monthly or quarterly payments from your income to the court, which shares them among your creditors, in proportion to the amounts you owe them.

If you don’t keep up the payments, the court may make an attachment of earnings order. This is sent to your employer, directing them to deduct amounts from your wages and pay them to the court for sharing among your creditors.

Pros

  • None of the creditors listed on the administration order application can take further action against you without the court’s permission.
  • The court deals with the creditors and shares out the payments for you.
  • Interest and other charges are stopped.
  • There is no upfront fee – the court takes 10p of every £1 you repay.
  • You can apply to make payments for a limited time, such as 3 years, using a ‘composition order’.
  • If your circumstances worsen, you can apply to the court to make reduced payments.
  • You may be able to continue running any business you have.

Cons

  • Creditors can put objections to the court and ask to be left out of the order. The court need not agree to this.
  • If you don’t keep up your payments, the order can be revoked (withdrawn) and the creditors can pursue you again.
  • If the court makes an attachment of earnings order, your employer will find out about your money troubles.

 

5. Individual Voluntary Arrangement (IVA)

 

How it works

You go to an insolvency practitioner who will prepare, negotiate and administer an arrangement for you to voluntarily repay your unsecured creditors. This may be done by using your spare income, a lump sum or other assets that you own.

If you have surplus income after meeting your essential household and personal expenses or have assets that can be used to pay your creditors or have access to a lump sum, for example from a relative, you may then consider entering into an Individual Voluntary Arrangement (IVA). If the unsecured creditors agree to your proposals this will protect you from recovery action that your unsecured creditors may take, and will usually involve your creditors writing off part of what you owe them. A proposal for an IVA will only be approved where enough creditors vote in favour.

The person you choose to supervise your IVA must be licensed and regulated under insolvency law as an insolvency practitioner.

The insolvency practitioner will charge fees for preparing, negotiating and administering your IVA. Before the practitioner asks you to sign up to an IVA, they should give you details of the fees they want to charge you and how these must be paid – whether as a lump sum or from the payments you make into the IVA.

Pros

  • Creditors who vote against your proposal can still bound by it should sufficient votes in favour be received.
  • Creditors whose lending is unsecured can’t take any further action.
  • Interest is usually frozen as long as you keep up your payments.
  • Your insolvency practitioner will help you prepare your proposal, including agreeing the level of your household and personal spending based on guidelines acceptable to creditors.
  • Many insolvency practitioners will allow you to pay their fees for preparing your proposal monthly, as part of the IVA.
  • You make only a single payment each month or week. Your insolvency practitioner is responsible for administering and distributing your payments.
  • The terms of an IVA will usually enable you or your spouse or partner or a relative to make arrangements to buy your share of the net worth of your home or to make extra payments, rather than the home having to be sold. This may be done through a remortgage or a loan. (Net worth means its value after any debts secured on it have been paid.)
  • On completion of the IVA, the balance of what you owe your creditors is written off.
  • You may be able to continue running any business you have.

Cons

  • Your IVA is entered on a public register.
  • The insolvency practitioner may require payment in advance for preparing your proposal and getting your creditors’ agreement.
  • If there is some equity (value) in your home after taking account of the mortgage(s) on it, you will probably have to pay for your share, usually in the fifth year of your IVA, by remortgaging the property. If you can’t get a remortgage, you may have to continue making monthly or quarterly payments from your income, for up to another year.
  • If your circumstances change, and your practitioner can’t get creditors to accept amended terms, the IVA is likely to fail. You will then still owe your creditors the full amount of what you owed them at the start, less whatever has been paid to them under your IVA.
  • If your IVA fails, you may be made bankrupt.

 

6. Debt Relief Order (DRO)

 

How it works

 

You should first seek debt advice, and if a DRO is considered suitable, you will be referred to an approved intermediary. (My Payment Plan can provide you with a list of these companies.) They will check that your situation fulfils the criteria and will help you complete the online form, and submit it for you to a government official called the official receiver. The official receiver then makes the order, if appropriate.

To get a DRO:

  • your debts must not exceed £20,000;
  • your assets must not exceed £1,000 (certain assets do not count, for example clothing, furniture) and a vehicle worth less than £1,000; and
  • your surplus income must not exceed £50 a month after paying your essential personal and household spending.

A DRO will last for 1 year, and once your DRO has ended you are released from your debts (with certain exceptions).

Pros

  • Your unsecured debts will be written off at the end of the DRO.
  • None of the creditors listed in the DRO application can take further action against you without the court’s permission.
  • It allows you to make a fresh start after 1 year.
  • The fee (£90) is affordable and can be paid in instalments but the fee must be paid before the application can be made.
  • You will keep your assets and a vehicle as detailed above.
  • The approved intermediary ensures that you are given appropriate advice and that you fit the criteria for a DRO.

Cons

  • Your DRO is entered on a public register.
  • You can’t have a DRO if you have an existing bankruptcy order, an IVA, are subject to bankruptcy restrictions, or you have had a DRO in the last 6 years.
  • You won’t be able to have a DRO if you own a house, even if it has no equity (value).
  • You will remain liable to pay certain debts – in particular:
    • student loans
    • fines
    • debts arising from family proceedings
    • budgeting loans and crisis loans owed to the Social Fund.
  • Your employment may be affected.
  • Your DRO could be revoked (withdrawn) if you don’t co-operate with the official receiver during the year your DRO is in force.
  • You can’t act as a director of a company or be involved in its management unless the court agrees.
  • You will be committing an offence if you get credit of £500 or more without disclosing that you are subject to a DRO.
  • You may have a debt relief restrictions order made against you for 2 to 15 years if you acted irresponsibly, recklessly or dishonestly.

 

7. Bankruptcy

 

How it works

Bankruptcy is a formal court procedure which you can start or which one or more of your creditors owed £5,000 or more. Your assets (with certain exceptions) are sold to help pay your creditors. However, you can usually keep your personal belongings, the contents of your home and your tools of trade (which may include your car) unless they have a high value.

If you have surplus income after meeting your essential household and personal expenses, you will have to make payments out of your income for up to 3 years.

Your assets and income are dealt with by a licensed and regulated insolvency practitioner or by a government official called the official receiver.

Bankruptcy usually lasts for 1 year, and once you have been freed (discharged) from your bankruptcy, you are released from your debts (with certain exceptions).

Pros

  • Debts are written off, with certain exceptions explained below.
  • Creditors can’t take further action unless the debts are secured on your home or other property.
  • It allows you to make a fresh start after only a year.
  • You may be able to avoid having to sell your home if your spouse, partner or a relative can buy your share of its value after any debts secured on it have been paid.
  • You are able to complete your application on-line

Cons

  • Your bankruptcy is entered on a public register and is advertised.
  • If you apply to the court for your own bankruptcy, you will have to pay a court fee and deposit totaling £680. This can be paid on-line.
  • You will remain liable to pay certain debts – in particular:
    • student loans
    • fines
    • debts arising from family proceedings; and
    • budgeting loans and crisis loans owed to the Social Fund.
  • Any business you have will almost certainly be closed down.
  • Your employment may be affected.
  • Certain professionals are barred from practicing if they are made bankrupt.
  • You can’t act as a director of a company or be involved in its management unless the court agrees.
  • You will be committing an offence if you get credit of £500 or more without disclosing that you are bankrupt.
  • You may have a bankruptcy restrictions order made against you for 2 to 15 years if you acted irresponsibly, recklessly or dishonestly.
  • An order that will place restrictions similar to those in force while a person is bankrupt, which the official receiver may apply for.

Disclaimer

This publication provides general information only. Every effort has been made to ensure that the information is accurate, but it is not a full and authoritative statement of the law and you should not rely on it as such.  Payment Plan Limited t/a My Payment Plan cannot accept any responsibility for any errors or omissions as a result of negligence or otherwise.