5.6 - Comparing Different Solutions for Individuals in Debt Flashcards
What does a consolidation loan do?
Provides enough money to pay off all of the other debts
Are consolidation loans secured or unsecured?
Secured
What will Citizens Advice advise debtors to do?
Make a list of income and current expenses, which should be put into order of priority
What payments class as high priority?
- Secured loans
- Payments that if missed could result in vital services being cut off
- Mandatory bills e.g. income tax
- Car insurance/running costs if debtor needs a car
Two main ways in which a debtor can make arrangements to pay extra each month to pay off arrears:
- Informal payment plans
- Debt management plan
What happens in informal payment plans?
The debtor contacts the banks and credit card companies to which they owe money, and explain the situation and what repayments they can afford to make.
Who runs DMPs?
Organisations such as StepChange
How do DMPs work?
The organisation will contact the debtor’s creditors and agree affordable monthly payments to each credit. The debtor then sets up a single monthly payment to the DMP manager, who passes it on to the creditors.
In what situation would creditors pass debt to a debt collection agency?
If an individual builds up an unsustainable amount of debt, but does not recognise the problem
What happens when a debt collection agency takes a debtor to court?
- The court decides how the debt should be repaid after the debtor explains their side of the story.
- If the debtor’s unsecured debts amount to less than £5,000 and the court accepts debtor cannot repay the debt in full, either the debtor or creditor can ask the court to impose an administration order under which the court will make arrangements for the debtor to pay their debts in monthly installments
Do CCJs and administration orders incur court fees?
Yes, these can be added to total debt
What situations can result in an IVA, DRO or bankruptcy?
- The debtor’s creditors may not agree to a DMP
- The debtor might fail to keep up the agreed monthly repayment required under DMP or administration order
- The debtor may have a number of CCJ’s against them
- The debtor’s outstanding total owed may amount to over £5,000
What is an individual voluntary agreement?
A formal agreement between debtor and creditors
Creditors representing what percentage of the total debt value have to agree to the arrangement for it to become legally binding?
At least 75%
Who sets up and supervises an IVA?
A licensed insolvency practitioner
Creditors will often agree to an IVA only if what?
The payments that they receive amount to at least 30% of the money owed
What happens if the debtor makes the monthly repayments for the full term of the IVA?
Their debts are classed as discharged
How to be eligible for a DRO
- Total unsecured debt of less than £20,000
- Surplus income of no more than £50 a month after household expenses
- Assets worth less than £300
Why are DRO’s quicker and easier than IVA or bankruptcy?
The debtor can apply online using one of the four authorised free debt advice agencies
Who are the four authorised free debt advice agencies?
- StepChange
- National Debtline
- Payplan
- Debt Advice Foundation
Is there an administration fee for DRO’s?
Yes
What happens once a DRO is in place?
The debts included in the order are frozen, so that the debtor no longer makes any repayments and the creditors cannot take court action to recover the debt.
After 12 months of a DRO what happens?
Debts are discharged
What happens if a debtor is not eligible for an IVA?
They may be forced into bankruptcy
Who can ask the court to declare a debtor bankrupt?
- Any creditor owed at least £5,000 on an unsecured loan
- An individual struggling to pay back unsecured debts
What happens if someone is declared bankrupt?
- The court will appoint the Official Receiver or a licensed IP to take over their finances.
- All debts, bank accounts and assets are frozen, and arrangements are made to sell most of the debtors assets, including their house
- Proceeds are used to pay off as much debt as possible
Debtors declared bankrupt will have to pay how much in court fees?
£700 plus legal fees if a solicitor is used
What is the main benefit of bankruptcy?
The creditors can no longer chase the debt
Disadvantages of bankruptcy
- Bad financial footprint for 6 years
- Debtor is only allowed a basic bank account for duration of bankruptcy
- Debtor loses home and assets
- Debtor barred from joining police or armed forces, or accountancy etc
In what debt management solutions are debts frozen?
DRO, IVA, bankruptcy
In what debt management solutions are debtors protected from action to recover debt?
DRO, IVA, bankruptcy
What amount of outstanding debt is repaid in a DRO?
None
What amount of outstanding debt is repaid in an IVA?
Between 30-50%
What are the legal and administrative costs for a DRO?
£90
What are the legal and administrative costs for an IVA?
£7,500
What is the minimum and maximum total debt for a DMP?
Minimum £5,000
Maximum limited to an amount that can be paid back over a reasonable time
What is the minimum and maximum total debt for a DRO?
No minimum
Maximum £20,000
What is the minimum and maximum total debt for an IVA?
Minimum £10,000
No maximum
What is the minimum and maximum total debt for a bankruptcy?
No minimum or maximum
How long does it take for debts to be discharged for an IVA?
After 5 years
How long does it take for debts to be discharged for a bankruptcy?
12 months
