Debt

Question 1

What are the debt management options available to a client? (5)

Answer 1

-Debt repayment plan-self managed/individually negotiated
-Debt management plan-adviser negotiates on behalf/adviser collects repayment
-Debt consolidation-refinance onto longer terms~higher default risk
-Individual voluntary arrangement-legally binding repayment plan negotiated by insolvency practitioner-avoids bankruptcy
-Bankruptcy-if over £5k creditor can petition for bankruptcy//assets paid out in pecking order//can be over in 12 months

Question 2

What is the pecking order for asset being distributed during bankruptcy?(7)

Answer 2

Fixed charge holders
Liquidators’ fees and expenses
Preferred creditors
Floating charge holders
Unsecured creditors
Interest incurred on all unsecured debts post-liquidation
Shareholders

Question 3

Why should ATR count when considering LTV in a debt?

Answer 3

Perhaps a high LTV doesn’t align with their risk profile

Question 4

Why does high interest rate bring into consideration ATR?

Answer 4

Exposes them to risk beyond what they are comfortable with

Question 5

What are the advantages (5)/disadvantages (5) of using isa money for paying debts

Answer 5

-debt will be accruing interest quicker than isa
-may improve credit rating
-tax free, normally no penalities
-increases disposable income
-can put isa contributions back in within the tax year

-Lost future growth in isa
-reduced emergency capital
-could be bad market timing ti take out
-lose tax wrapper benefit
-penalities

Question 6

Benefits/procedure of lending to children (5)

Answer 6

Better to gift (eg.3000 or 5000 etc)

Cheaper than commerical loan

If interest is charged-must be declared as income by parent

Borrower may get tax relief dependant in purpose of loan

Loan agreement can be put in place