11. Dealing With Debt Flashcards
1
Q
How do people fall into debt?
A
- changes in personal circumstances
- lose job
- increase costs of mortgage - interest rates rise
2
Q
What should people do who are in debt?
A
- get free impartial advice
- use a budget to work out what they can repay
- negotiate with lender amounts they can afford to repay
- increase their income e.g. sell an asset (car) , over time
3
Q
Advisory organisations
A
- Money Advice Service
- StepChange Debt Charity
- Citizen Advice
- National Debtline
4
Q
Changing products to help with debts?
A
- individuals with a good credit rating can switch credit card debt to another provider that does not charge interest on balance transfers (there may be a handling fee)
- individuals who are struggling to repay a loan may extend the term of the loan - this increases overall cost though + there may be set up fees for new loan
- some borrowers may take out a long term loan to pay off a shorter term one
5
Q
What is a consolidation loan?
A
- a loan used to pay off several different debts
- e.g. credit cards, overdrafts etc.
- a monthly repayment is made to the loan provider
6
Q
What does an individual need to consider when taking a consolidation loan?
A
- full costs involved in the new loan
- must be able to afford the repayments on the loan if they are to clear their debts
- the overall cost must not be greater than the cost of the individual loans
7
Q
Prioritising
A
- individuals should prioritise loans for repayments
- they should pay off the most expensive first
8
Q
Debt management plans
A
- people who have lots of different debts may set up a debt management plan
- do not apply to mortgages and rent
- the person pays the debt management company each month who splits the money between those the individual owes money to
- this means the individual doesn’t have to deal directly with those they owe money to
9
Q
Are debt management plans free?
A
- free from most charities
- some organisations charge fees
10
Q
What is an administrative order?
A
- a repayment plan
- applies to people that have less than £5,000 in unsecured debt and at least one CCJ against them
- individuals can apply to the court + the court decides what the individual in debt can afford
- individuals pay one monthly repayments of an amount they can afford to the court + the court pays the creditors
- creditors are not allowed to contact debtors directly to ask for further payment + not allowed to add interest
11
Q
What is a debtor?
A
Someone who owes money
12
Q
What is a creditor?
A
Someone who is owed money
13
Q
What is insolvency?
A
An individual can’t pay their debts
14
Q
What are solutions for insolvency?
A
- Individual voluntary arrangements (IVA)
- debt relief orders
- bankruptcy
15
Q
Individual voluntary arrangements
A
- under an IVA people have reduced, affordable repayments for 5 to 6 years and then their debt is written off
- IVAs apply to those with unsecured debts that are larger than their value of assets
- an insolvency practitioner (usually a lawyer or accountant) negiotages with the creditor on the debtors behalf
- debtors make affordable repayments
16
Q
What is debt relief orders?
A
- allow people to write off their debts if they are unable to repay after 12 months
- applies to debtors who owe less than £30,000 of unsecured debt who are not homeowners
- have no more than 32,000 in assets and have no more than £75 a month after living expenses
- debtors must pay £90 to DROP + apply to the courts
- debts are frozen for 12 months
- stays on a persons credit history
17
Q
Bankruptcy?
A
- court order when a persons assets are shared between their creditors who write off the remaining debt within a given period of time e.g. 12 months
- official receiver is appointed who can can seek the persons assets and use any savings to repay creditors
- if the person still owes money after it is likely the debt will be written off
- bankruptcy fee of £7000
18
Q
Advantages of bankruptcy
A
- debtors do not deal directly with creditors
- debts can be written off after 12 months
- debtors keep certain possessions e.g. household goods, and an amount to live on
- when bankruptcy is over, debtors have a fresh start
19
Q
Disadvantages of bankruptcy?
A
- record remains for 6 years
- difficult to get credit for 6 years
- assets have to be sold to repay debts e.g. home, car, luxury goods
- cost of bankruptcy
- debtors can only use basic accounts they can go overdrawn
- if debtor owns a business, mostly likely to be closed down and the assets sold
- if the court considers the debtor have no intention of repaying their debts or did not co-operate with the official receiver the bankruptcy restriction could last 15 years
20
Q
Debt arrangement scheme?
A
- run by Scottish government
- similar to debt management plan
21
Q
Trust deed
A
- similar to IVA
22
Q
Minimal asset process (MAP) bankruptcy
A
- introduced in Scotland
- replaced the low income low asset option
- MAP allows you to write off debts you are unable to pay off in a reasonable time
- a fee is paid + debts are written off within 6 months
23
Q
What is sequestration?
A
- bankruptcy in Scotland
