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Tackling your debts

The cost of insolvency

Posted 16 March 2015

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Thinking of getting an IVA, DRO or declaring yourself bankrupt, but don’t know what will happen and how much it will cost? Check out our short guide.

 

If you have problem debt and are thinking of insolvency to help you get your finances back on track, you may find this guide useful. Insolvency is not something to rush into: if you need advice about whether it is appropriate for your particular situation then you should speak to a debt advisor or seek independent advice. They’ll be able to talk you through the different options available in more detail.

 

If you decide to enter into an insolvency solution with us, there are various fees and costs involved … which are explained below.

Individual Voluntary Arrangement (IVA)

If you can’t keep up with your debt repayments then you may want to consider an IVA if you live in England, Wales or Northern Ireland. If you live in Scotland, you may wish to consider a Trust Deed which works in a broadly similar way.

With an IVA you make affordable monthly payments towards the unsecured debts included within it, typically over 5 years. At the end of the 5 years, any unsecured debt included in your IVA that you have left is written off. An IVA will have a negative impact on your credit rating, usually for a minimum of six years, however, if you have already been missing repayments, it is likely that your credit rating will be poor anyway.

 

With an IVA your property is protected, however, you may have to release equity from your home in the final year of your IVA to help repay your debts. If you're unable to remortgage, your IVA could be extended by up to a year so you can make more monthly payments instead.

 

How much does it cost?

 

We will only charge a fee if your IVA is accepted by your lenders. The fees are taken from the affordable monthly payment that you make to us, before we pass the balance onto your creditors. Your IVA proposal will include a section on our fees and your lenders will approve them before your IVA is accepted.

 

Example:

For a typical client who owes £22,424 to their unsecured lenders and can afford regular monthly payments of £198 over a 5 year term IVA:

 

Total monthly payments into IVA - £198 X 60 = £11,880

 

From which the following will be deducted:

 

Nominee's fees: £1,267

 

Supervisor's fees: £1,720

 

Supervisor's costs: £900

 

Unsecured debt written off on completion: £10,544 (47%)

 

This example assumes that there is no equity in any property owned by our client, and they do not receive any regular overtime or bonus payments.

For more details on IVAs click here.

Bankruptcy/Sequestration

Another debt solution you may wish to consider is bankruptcy (sometimes known as sequestration if you live in Scotland). It will have a seriously negative impact on your credit rating and homeowners may have to sell their home. But if you can’t keep up with your debt payments and don’t feel you’ll ever be able to get back on track you may wish to consider this type of debt solution. It is normally considered a last resort.

 

How much does it cost?

 

If you live in England and Wales:

 

We’ll give you advice and support and we will also help you prepare the court documents you need to petition for your own bankruptcy. We do not charge for our bankruptcy support services, but you will have to pay a fee to the court when you make your application.

 

The fee in England and Wales is £525, plus £180 for court costs. If you are on certain benefits you may not have to pay the court costs, but you will still have to pay the £525.

 

If you live in Scotland:

 

You will have to pay a £200 application fee for Sequestration. During your Sequestration you will have to pay your Trustee’s professional costs, which will be taken from any assets before any remaining balance is paid to your creditors.

For more details on Bankruptcy click here.

Debt Relief Order (DRO)

If you owe less than £15,000 and have less than £300 in assets you may want to consider a DRO as an alternative to bankruptcy if you live in England, Wales or Northern Ireland. If you live in Scotland, you may wish to consider a Minimal Asset Process (MAP), which works in a similar way.

 

You will need to go through an intermediary, such as Debt Advisory Centre, as you can’t apply for a DRO directly yourself. As with all insolvency solutions it will have a negative impact on your credit rating.

 

With a DRO you won’t make any payments towards the unsecured debt included in it for twelve months and if, at the end of the year your financial situation hasn’t improved then the unsecured debts included in your DRO are written off.

 

How much does it cost?

We don’t charge for our services, but you will have to pay the Insolvency Service an application fee of £90.

 

For more details on DROs click here.

by Emily Bancroft

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.