Topic 11 - Dealing With Debt Flashcards
what are 3 reasons people fall into debt?
- change in personal circumstances
- loss of job
- increase costs of mortgage
what are 4 things people should do when in debt
- get free impartial advice
- use a budget to work out what they can repay
- negotiate with lenders amount affordable to repay
- increase they’re income, selling an asset such as a car
What are 4 advisory organisations who may give free impartial advice on dealing with debt?
- money advice service
- stepchange debt charity
- citizens advice
- national debtline
how can one increase their income to repay debt?
- taking on more work
- selling an asset
- claiming all the benefits they are entitled to.
After working out what they can afford to repay of their debt after creating more income, what should they do next?
negotiate with their lender
what are 4 ways people can change products in debt?
- with a good credit rating can switch credit card debt to another provider that does not charge interest, may have handling fee
- if struggling to pay off a loan could request an extension
- take out a long term loan to pay off the shorter term loan
- consolidation loan
what is a consolidation loan?
one loan taken out to pay all the debts
what should be considered before taking out a consolidation loan? (3)
- full costs involved in the new loan
- must be able to afford the repayments on the loan to clear debts
- overall cost must not be greater than of the individual loan
how should one prioritise paying off their loans?
- paying off the most expensive first
what’s the best method of resolving a debt when having multiple different debts?
setting up a debt management plans
where do debt management plans not apply?
mortgages and rents
what is a debtor?
someone who owes money
what is a creditor?
someone who is owed money
what is a DMC?
debt management company
what does a DMC do?
once paid for by the debtor, splits the money between the creditors
What is an administration order?
a repayment plan
who do administration orders apply to?
people who less the £5k in unsecured debt and at least one CCJ against them
what is CCJ?
county court judgement
what happens when an administration order is in place?
- individual applied for it to the court
- the court decides what the individual in debt can afford
- individuals pay one monthly repayment of an amount they can afford to the courts
- the court pays their creditor
- creditors can’t contact debtors or add interest to the debt
how can a person be insolvent?
if they can’t pay their debt because it is greater than their assets.
what are some solutions for insolvency? (3)
IVAs
Debt relief orders
Bankruptcy
what does an IVA stand for?
individual voluntary arrangements
what occurs in an IVA?
people hav reduced, affordable repayments for 5-6 years and then their debt is written off
who does an IVA apply to?
those with unsecured debts that are larger than their value of assets
who negotiates an IVA?
an insolvency practitioner
- this is usually an accountant or lawyer
What does DRO stand for?
debt relief order
Who do DROs only apply too?
- owe less than £30k in unsecured debts
- are not homeowners
- have no more than £2k in assets, excluding a vehicle worth up to £2k
- less than £75 a month left over after having paid living expenses
What occurs in the 12 months debts are frozen in an DRO?
creditors can’t add any interest
creditors aren’t permitted to contact the debtor to ask for payment
what are 4 advantages of DROs?
- the household goods and tools of the trade are not just clouded in the asset calculation
- it gives the debtor time to change their personal circumstances if they can, by increasing assets eg
- debtors won’t be pressurised to repay during the 12-month period as their don’t wont grow
- it is a cheaper insolvency solution than bankruptcy for people who have low incomes
what are 2 disadvantages of a DRO?
- remains on persons credit history and public register thus difficult for them to borrow money during this time.
- the cost of £90, although lower than other options can be difficult for people on very low incomes to pay
What is bankruptcy?
A court order that means a persons assets are shared between their creditors who write off the remaining debt.
How can one become bankrupt?
- People can apply to become bankrupt themselves
- One of their creditors can apply to make them bankrupt
What are 5 advantages of going bankrupt?
- debtors don’t deal with creditors directly
- debts can be written off in 12 months
- debtors keep certain possessions, such as a household goods, and an amount to live on
- when over debtors given fresh start
- creditors have to stop most types of court action to recover their money
What are 10 disadvantages of bankruptcy?
- costs involved in the process
- can’t apply for more credit while they are bankrupt
- can only use a basic current account because they can’t go overdrawn
- record remains on credit history for 6 years after he start of bankruptcy, difficult to obtain credit for 6 years
- assets have to be sold to repay their debts
- barred from certain occupations thus may loose job
- if debtor owns a business, likely to be closed down and assests sold
- details are published and may be reported in the media
- if deemed that the debtor was uncooperative or had no intention of paying their debt, the order can last for 15 years.
What are the 4 insolvency solutions in Scotland?
- debt arrangement scheme
- trust deed
- MAP bankruptcy
- sequestration
What is the debt arrangement scheme?
Very similar to the debt management plan but run by the Scottish government
What is a trust deed?
- similar to an IVA
- make repayments debtors can afford and after four years any outstanding debt is written off
What does MAP stand for?
Minimal asset process
What requirements must you have to be eligible to apply for MAP bankruptcy? (6)
- your on a low income
- debts between £1.5k and specified higher amount usually £17k but raised temporarily to £25k due to Covid
- not a homeowner
- any vehicle owned is worth less than £3k
- assets worth less than £2k
- havnt been made bankrupt in last 5 years
What is sequestration?
The term for bankruptcy in Scotland
