Debt Options

Debt Remedy Tool

The Advice Guide website has a Debt Remedy Tool that can help a client identify their debt options. However, be sure before using this that you are liable to repay the debts.  If there is any doubt – seek advice first!

 

 Advice Guide Debt Remedy Tool

Informal Options

There are various information options available that are agreed directly with the creditor. These are called informal options as they do not involve any court action.  All non priority creditors must be treated fairly and usually on a pro rata basis. Pro rata means that any available income is shared out fairly between non-priority creditors so each creditor gets a percentage of the available income, based on the amount owed. For general advice on debt options, see our Adviceguide website:

 

Options for Dealing with Debt

Payment Plan

If there is available income an option is to make reduced monthly payments with creditors to clear the debts in full. This is suitable when someone has enough available income to pay their debts off within a reasonable period. The good is that it is based on what the client can afford and interest and charges are usually frozen.  The bad is that it can take some time to repay debts and offers may need to be renegotiated in time.  It charges continue after a reduced payment, seek debt advice.  

 

Making re-payments to Non-Priority Creditors   Debt Letter Generator for Creditors

   
My Money Steps website   National Debtline website   National Debtline Resource Pack

Debt Management Plan (DMP)

This is the same as the above in that it is an informal agreement to make reduced payments to creditors.  The difference is that a Debt Management company distributes the payments in a Debt Management Plan (DMP) and you make one monthly payment to the DMP. 

 

The good is the same as the above, in addition to making one payment instead of controlling multiple payments to multiple creditors. 

 

The bad, in addition to the above, is that this often costs and the fees can be high.  There is no reason to use a DMP that charges when there are some available for free!  

 

Advice Guide: Debt Management Plans   Debt Management Plans Explained   Debt Management Plan Factsheet

 

Payplan Free Debt Management Plan Provider *

*We still advise you to read the information above before pursuing this option or refer your client to a debt adviser to check this could be the right option for them.  See Payplan’s website link below:

Step Change (previously the Consumer Credit Counselling Service)

Step Change can help set up a DMP but your clients would have to make actual payments to the creditors themselves. 

 

Step Change website

Token Payments

This option involves a small payment of £1 per month to all non priority creditors.  This is generally suitable for temporary financial difficulties.  The more creditors your client has, the more these token payments may add up.  The good is that these small token payments can generally be accepted for short term difficulties (usually 3-6 months) and interest and charges are usually frozen.  The bad is that this is NOT a long term option or it would mean a lifetime of debt and it can cost more to make the payment.

 

No money to offer non-priority creditors advice   National Debtline Factsheets

Write Off

In some cases a creditor will agree to write off a debt. This means that they agree not to pursue the debt, particularly if there is no available income or assets; the situation will remain the same for the medium to long term future and there is evidence of the clients’ situation. Evidence will be the financial statement and a GP/medical letter.  This is an option for those in difficult circumstances and/or dealing with severe illness or a family disaster.

 

The good is that, if accepted, the client does not have to repay the debt. The better the evidence: the better the prospect of success. The bad is that it can take some time to agree, the debt is still marked as not paid on the credit report and creditors may try again to collect the debt in the future by referring the account on to a different debt collector.

 

Debt recovery may continue while the request is investigated and there is no guarantee of a successful outcome.  It may cost the client to obtain a letter from their GP, who may not be willing to make a medium to long term statement about the possibility that the client may not get better.

 

Advice Guide: Asking to write of debt   Advice Guide: Request to Write of Debt  

 

National Debtline: Options for Dealing with your Debt Write off

Partial Write Off

This is usually for situations where someone can make reduced payments for a fixed amount of time with the remaining balance then written off.  This could be possible in situations where someone can make affordable repayments now but may not be able to do so in the future, for example, when they near retirement.  The implications are similar for reduced payments and write off requests. 

 

In addition, the debtor has a target to aim for and will know when they will be ‘debt free’.  They will also be reducing their debt at a rate they can afford and they will repay less overall.  However, it can be difficult to get creditors to agree and the debt may still show us as outstanding on their credit report.

 

Call Adviceline Cymru 03444 77 20 20

 

National Debtline: Partial Write Off Factsheets  Find your Nearest CAB

Paying a Lump Sum in Full and Final Settlement

This option involves paying a lump sum off the debt and the creditor writing off the rest. The lump sum is usually not enough to repay the total debt but creditors will often accept much less to close the account. Where there are multiple creditors any lump sum must be distributed on a pro rata basis. This can be suitable when a lump sum is received, for example a benefit backdate of personal injury payment, and the client has little or no ongoing available income. They would therefore not pay the whole balance back.

 

The advantage is that if accepted, nothing further is owed. It is more immediate and convenient than paying back a lower amount over a longer time. The bad is that the client will lose the benefit of the lump sum; their credit rating will still be affected for 6 years as the balance will still show as outstanding and creditors often, despite agreeing in writing not to pursue the debt, may refer the account to different debt collectors after a few years. It is important that your client keeps any letters accepting the reduced payment safe and does not make payment unless they receive confirmation in writing.

 

There are legal issues involved that involve contract law. However, if the creditor has agreed, this should not be a problem.  

In practice, if this is an option, always refer your client to a debt adviser first before any action is taken.

 

National Debtline: Full and Final Settlement Offers

Moratorium/hold

This involves the creditors agreeing that no payment is made and no interest and charges accrue for a fixed period of time.  The good is that no payment is requested and the debt does not increase for an agreed period of time. This can give an adviser and the client time to gather the facts and especially to ensure that the financial statement is as realistic as possible.  This can remove the immediate pressure.  The bad is that in practice, a hold usually lasts for a month to allow time to draft a financial statement.  This can be longer with medical evidence but creditors are only likely to hold an account for the very short term without further interest and charges being applied.  Not all creditors will agree a hold so the debt could continue to grow and this option does not solve the actual debt issue.

 

Advice Guide: No money to Offer non-priority Creditors   National Debtline: Information and Sample Letter

Voluntary Charge

This option is where the client agrees voluntarily to secure the debt on an asset, usually the on their property, if they own it. This can be an option if the client has large debts and no other way to pay them off or the client wants to avoid other creditor action. The good is that it can stop formal insolvency proceedings or committal to prison or repossession.  The client can still make small repayments based on what they can afford to reduce the debt. The bad is that it is rarely in the client’s interest to make a non priority debt a priority one by securing it. Statutory interest at 8% a year is applied so the debt could grow, or the client would have to pay more than the amount added to ensure that the debt reduces.  

If you are thinking of securing the debt on your home we advise you to seek debt advice about this.  

 

Find your nearest CAB   National Debtline website

Borrowing Money to Pay Off Debts

This option involves borrowing more money to pay off existing debt. This is sometimes known as a consolidation loan.  The good is that all previous debt recovery stops as these debts will be repaid from the lump sum. The bad is that it is usually not a good idea to borrow money to pay off debts as this only makes the debt situation worse. Often the repayment on the new loan is what was paid on the old debts (or more). The total amount of debt will increase and interest rate may be higher because of the old debts and the effect on the credit rating. The client is effectively paying interest on top of interest. Check that any new loan is not secured on any property as this would turn the debts into priority debts and is likely to be more expensive long term if built into a remaining mortgage term.

If this is identified as an option that client’s should seek further financial advice about this and, at the very least, work out what they need to borrow and whether they can afford to make the repayments required.  See a link below to the Money Advice Service loan calculator.

 

Money Advice Service loan calculator

 

For financial guidance contact the Money Advice Service and they will put your client in touch with a Money Adviser in their area:

• 0300 500 5000

Formal Options

These are options that involve formal County Court action or some form of insolvency.

Administration Order (AO)
An administration order is an order of the court that consolidates debts. This means the client makes one payment into court each month which the court then distributes to the creditors on a pro rata basis.  The court can also make a composition order. This means that only a proportion of the debt is repaid.

To get an AO you must have:

• Debts that are no more than £5000 in total
• An unpaid county court judgment (CCJ). This includes a traffic penalty registered for enforcement in the Traffic Enforcement Centre at Northampton County Court.
• Two or more debts.

There's no upfront fee. The court keeps 10% of your monthly payment to cover their costs.  An administration order lasts until the debts are cleared and the court fees paid, unless a composition order is made when there will be a time limit on how long you pay for, usually three years. At the end of that time, you no longer owe the debts in the administration order.  Your credit rating will be affected.

 

Advice guide: Administration Orders   National Debtline: Administration Order Factsheet

 

Debt Relief Order (DRO)

A debt relief order is an order you can apply for if you can't afford to pay off your debts. It's granted by the Insolvency Service and is a cheaper option than going bankrupt.   A debt relief order usually lasts for a year and during that time, none of the people owed money will be able to take action to get their money back. At the end of the year, a debtor is released from all the debts listed (and included) in the order.

To get a DRO you must have

•  Have debts of £15,000 or less at the date when the application is determined by the Official Receiver (excluded debts are not counted in this total)
• Have available income, after paying normal household expenses, of £50 per calendar month or less
• Have assets with a gross value of £300 or less. Vehicles worth under £1,000 are ignored when assets are valued. However, the value of a vehicle worth more than £1,000 but which has been adapted for the client to use because of a disability may be ignored

To apply for a DRO, you'll need to contact an authorised adviser who checks whether you meet the conditions and then applies for the order on your behalf. The order will cost you £90 but you can pay this in installments over six months.

 

If your circumstances change and you no longer qualify for a DRO within the year period, then your DRO could be revoked and you could lose your £90 fee.  Your credit rating will be affected.

 

Advice Guide: Debt Relief Orders   National Debtline: Debt Relief Order Factsheets  

BIS: Insolvency Publications 

Bankruptcy

Bankruptcy is a way of dealing with debts in which the court makes a bankruptcy order against a debtor who is unable to pay their debts. A trustee is appointed to take over the management of the debtor’s financial affairs for a limited period and to use the debtor’s available income and assets, if any, to pay the creditors. The trustee is either the Official Receiver or an insolvency practitioner.  Once a debtor has been made bankrupt, they have a duty to co-operate with the trustee and make full disclosure of all their financial affairs.  

When the debtor is discharged from bankruptcy the money owed is usually written off. In most cases, this can be after only one year.Creditors have to stop most types of court action to get their money back following a bankruptcy order.

However, there are disadvantages to going bankrupt, including the cost of up to £700, loss of your home if you own it and loss of other valuable possessions too.  Your credit rating will be affected.

It is important that you seek full debt advice on all of your options, including full implications of bankruptcy and how this will affect you, before deciding on this action.

 

Advice Guide: Bankruptcy   National Debtline: Bankruptcy Factsheets   BIS: Guide to Bankruptcy

Individual Voluntary Arrangement (IVA)

An Individual Voluntary Arrangement (IVA) is a formal and legally binding agreement between you and your creditors to pay back your debts over a period of time.  An IVA must be set up by an Insolvency Practitioner.  An IVA can be flexible to suit your needs but it can be expensive and there are risks to consider.  Most debts can be paid off through an IVA but there are some exceptions.

You may be able to enter into an IVA if:

• you have at least £100 spare income each month
• you have at least two separate debts
• you have debts totaling over £10,000
• you have at least two different creditors.

An IVA is usually time limited to 5 or 6 years and, after this time creditors will accept that only a part of the debts will be repaid.  The rest is written off. 

 

It can be an expensive option because of the insolvency practitioner and administration fees that could be more than £5,000. There could be some implications if you own goods of value and your credit rating will be affected.

 

Advice Guide: Debt Individual Voluntary Arrangements  BIS: Fast Track Insolvency Arrangements

 

National Debtline: Individual Voluntary Arrangements Factsheets