— Sue Phillips from the Citizens Advice Bureau in Lincoln is bringing a four-part series on personal finances for The Lincolnite. This week she looks at the options when your debt becomes unmanageable.
There are many reasons why you might find yourself with serious financial problems, including losing your job or a change in family circumstances.
Unfortunately there is no obvious and simple solution but a range of options are available if you are having difficulty repaying large debts and this post looks into three of them, including bankruptcy, an Individual Voluntary Arrangement (IVA) and a Debt Relief Order.
Bankruptcy
You can apply to a court for a bankruptcy order however much you owe, or your creditors can apply if you owe at least £750. You pay bankruptcy fees of £700, £525 for managing your bankruptcy and £175 in court costs. If you receive benefit income, you may be exempt from paying the court fee.
If a court declares you bankrupt, an official known as the ‘Official Receiver’ will take control of your money and property, and manage your creditors (the people to whom you owe money).
If you own your own home it may have to be sold, along with some of your possessions such as your car or other luxury items.
Your bank accounts will be frozen and in the future you may find it difficult to borrow money or open a bank account. Some professions will not let you carry on working with them if you are made bankrupt.
Debts such as student loans, court fines and maintenance and child support payments cannot be written off.
Bankruptcy normally lasts for one year, after which you are freed from the debts you owe and any bankruptcy restrictions.
Individual Voluntary Arrangement (IVA)
An IVA may be a more suitable option to bankruptcy if you have assets you wish to protect.
An IVA can only be arranged through an insolvency practitioner (IP) who will put forward a payment plan to your creditors based on your financial circumstances.
If 75% of your creditors accept the proposal, a formal agreement is set up between you and your creditors to pay back all or part of your debts over a fixed period, usually 5 years. The IP will charge fees for setting up and supervising an IVA, which can be high.
Beware of an IP who asks you to pay up front before doing any work for you and before you sign up, make sure you know exactly what you will be charged, plus how and when you will be expected to pay.
If you make all your monthly payments, at the end of the period the rest of the debt is cancelled.
Debt Relief Order (DRO)
Debt relief orders (DRO) were introduced in April 2009. If you have unsecured debt of less than £15,000, are not a homeowner and have a low income, you might choose a DRO, which is a cheaper option to bankruptcy. An application will cost you £90. This can be paid in instalments; however payment of the fee will need to be made in full prior to the application being submitted.
If you have more than £50 per month in spare income, or if you own a car worth more than £1,000 or your assets plus any savings are worth more than £300, you will not be able to apply for a DRO.
A DRO is granted by the Insolvency Service, not by the courts, but you can only apply for one through an approved third party, known as an intermediary. Intermediaries are available to help you at your local CAB.
A DRO normally lasts for one year, and during this time you will generally not need to make any payments to the creditors listed in the order and they will not be able to take any action against you.
When the DRO finishes, if your circumstances have not changed, all the debts listed on it will be written off and you will not have to pay them.
If you need further help, a skilled debt adviser can help you make a decision about which is the right one for you and you can speak to a specialist at your local Citizens Advice Bureau or contact the Insolvency Service.
— Next series: This concludes the series on debt but Sue Phillips returns on April 16 with a new four-part column about consumer advice. For further questions about this article or personal finance you can get in touch via email.
Sue Phillips works at the Citizens Advice Bureau in Lincoln.
