Debt relief solutions in the UK and Scotland
With interest rates remaining at record lows and the economy appearing to be on the recovery trail you would think that debt problems and the need for debt relief solutions would be on the decline. Recent figures regarding the amount of people struggling with council tax debt however would suggest a different story, a story of families still struggling to keep up with the cost of living and maintain their current debt commitments.
In the past we’ve discussed various different debt relief solutions on our blog both for the UK and Scotland. As important as it is to look at each option in detail, it can also be equally helpful to look at a brief overview of the solutions on offer, so that is what today’s post is all about. I should also mention that we are discussing Scotland separately not because of the possibility of forthcoming independence but because the solutions can differ significantly from those available to the rest of the UK.
When many people think about wiping out their debts, the first thing that often comes to mind is bankruptcy. So what is bankruptcy?
Bankruptcy is a legal method for dealing with debts when all other options have failed or have been found to be inappropriate. The consequences of going down the bankruptcy route are severe and therefore it would be wise to seek professional advice before making an application for bankruptcy.
When a debtor is declared bankrupt they will have to hand over their estate including their home in order to repay as much of their outstanding debt as possible. The debtor will be able to keep some items that are essential for everyday living but they may be required to make some form of contribution from their regular income.
A person may be made bankrupt by someone else or sometimes a person may decide to make themselves bankrupt. A bankruptcy lasts for one year but it could affect your ability to get credit for up to 6 years. In England and wales it costs £705 to go bankrupt when all fees have been taken into account.
In Scotland bankruptcy is sometimes called sequestration.
Debt Relief Order
A debt relief order is a kind of mini form of bankruptcy for those who have debts of £15,000 or less. It cost £90 to get a debt relief order so the cost are far less than the costs of bankruptcy but there are certain criteria which you must meet in order to qualify for a debt relief order. For more information on the criteria and to see if you qualify check out this government web page.
IVA (Individual Voluntary Arrangement)
An Individual Voluntary Arrangement is a legally binding agreement between a debtor and their creditors. An IVA normally lasts around 5 years and during this period you will be expected to pay what you can afford to pay in order to repay your debts outside of reasonable living costs. An IVA has to be set up by a licensed professional. For more information on what and IVA is and how it differs to bankruptcy take a look at our previous post on the subject here.
Debt Management Plans
If you have debts of £1,000 or more owing to at least 2 creditors then you may be eligible to apply for a debt management plan. A debt management plan is designed to group your debt into one affordable payment which is agreeable to the creditor. You will then make just one monthly payment to your debt management plan advisor and they will then distribute this between your creditors. Again we have written a more in-depth post on debt management plans which can be found here.
Although debt consolidation doesn’t get rid of any of your debts it can be used to make the repayments more affordable either by extending the term over which your debts are repaid or by reducing the amount of overall interest payable, often by taking high interest debts like those on credit or store cards and refinancing them into a loan with a lower rate of interest. One thing to be careful of when consolidating your debts is taking unsecured debts and securing them against your home in the form of a homeowner loan. This course of action can have severe consequences if you were to fall behind on your repayments, possibly leading to you losing your home.
If you have for any reason received a lump sum of money, you may be able to use this to make a one off settlement offer to your creditors.
If you have fallen behind with your debt repayments then some creditors may be willing to accept a short settlement on your debt, allowing you to pay a one off lump sum of a lower amount then you currently owe in order to clear your debt with the creditor. This is known as a ‘full and final settlement’ offer. The offer can be less than the outstanding balance on your account but if it is accepted by the creditor then it will be accepted as full payment.
A trust deed is only available in Scotland and it is similar to the IVA available in the rest of the UK. A trust deed is a legally binding agreement where you will make reduced payments for a period of 4 years after which time your debts will be written off. You can find more information on Trust Deeds at Scotland’s Trust Deed.
Securing debts against your home
There are other forms of debt consolidation that can be considered like re-mortgaging and equity release but as they may secure your debts against your property it is advisable to seek professional mortgage advice before going down any of these routes as we have already mentioned regarding homeowner loans.