When considering a debt solution, it’s important to understand that they all have benefits and consequences. Here are the different solutions that may be suitable for your situation. Speak to a debt expert, as they’ll be able to advise further.
Individual Voluntary Arrangement
An Individual Voluntary Arrangement (IVA) lets you pay back as much of the unsecured debt that you have as you can, usually over a five year period. You’ll make regular payments, which will be affordable for you and will leave you with enough money to cover all of your essential living costs, which includes things like your rent or mortgage, food, utilities and travel costs.
On successful completion, an IVA will write off any included outstanding balance you have on your unsecured debts.
IVAs do have consequences. For example, if you’re a homeowner, you may be asked to release some of the equity in your property in the last year of the Arrangement. If you’re unable to do this for some reason, your IVA may be extended for up to an extra 12 months. An IVA will affect your credit rating and whilst running, and for three months after it has closed, your details will appear on the Insolvency Register, which is publically available.
IVAs are only available to residents of England, Wales and Northern Ireland.
Find out more about IVAs here.
Debt Management Plan
A Debt Management Plan could help if you’re unable to afford your current monthly payments to your unsecured debts but you could afford a reduced payment each month. You will continue making payments towards your debts, while making sure you’re left with enough money to cover your essential living costs, which includes your rent or mortgage, food, utilities and travel costs.
You can speak to your lenders directly, or choose a Debt Management Plan provider to negotiate new lower monthly payments with your lenders – the payment will be affordable and sustainable for you. You or your provider can also ask your lenders to freeze charges and interest on your accounts too. Your lenders do not have to agree to do this, however if they can see that you are genuinely struggling with your finances, they often will.
There are also consequences to Debt Management Plans. As an example, reducing your monthly repayments will affect your credit rating, which will make it harder for you to obtain credit in the short to medium term, but could affect you in the longer term too.
Find out more about DMPs here.
Bankruptcy, or sequestration as it is known in Scotland, may be an option if you can’t realistically afford to pay your unsecured debts back in a reasonable amount of time.
You’ll only have to make payments if you can afford to. If you can, you’ll pay back as much as possible and these payments will take into account your essential living costs, such as your rent or mortgage, food, utilities and travel costs to make sure they’re sustainable. They can continue for up to three years (or four years if you live in Scotland). You’ll usually be discharged within 12 months and whatever you can’t afford to repay will be written off after that time period.
There are consequences associated with bankruptcy/sequestration. If you’re a homeowner, your property may be sold to help repay your debts, along with other assets. And as a default will be registered on your credit report, your credit rating will be affected for six years (and possibly longer) and this will affect your ability to obtain credit. Details of your bankruptcy/sequestration will also appear on the Insolvency Register until three months (or the Register of Insolvencies in Scotland for two years) after it has ended.
Find out more about bankruptcy here.
Find out more about sequestration here.
Debt Relief Order
A Debt Relief Order (DRO) could provide a lower cost route into insolvency than bankruptcy if you can’t realistically afford to repay your unsecured debts in a reasonable amount of time. It’s available for residents of England, Wales and Northern Ireland, but you will need to meet strict criteria to be eligible. This includes having a limited level of income after paying for your essential living costs, as well as having few assets that you could contribute towards your debts.
Once your DRO is agreed, your payments on your unsecured debts will be suspended for 12 months. If your circumstances don’t improve in that time, the outstanding debts will be written off.
DROs do come with consequences. It will be recorded on your credit file, which will be negatively impacted for six years from when the DRO is approved, making it harder for you to obtain credit, for example. Details of your DRO will be added to a publicly available Insolvency Register.
Find out more about Debt Relief Orders here.
Minimal Asset Process
The Minimal Asset Process (MAP) is a simplified form of bankruptcy for Scottish residents that could be a suitable solution if you cannot afford to repay your unsecured debts at all. To be eligible for MAP you need to meet strict criteria. This includes having no income left after paying for all of your essential living costs, as well as having few assets.
Your payments on these unsecured debts will be suspended for the period MAP runs for. As long as it’s completed successfully, any outstanding unsecured debt that’s included in your MAP will be written off. MAP is a shorter process compared to bankruptcy and you could be discharged in just six months. If your circumstances improve during that time you will become subject to the full bankruptcy process and be expected to pay whatever you can afford.
However, as MAP is a form of bankruptcy, it does have consequences. For example, it will have an impact on your credit rating for six years after it begins, and may continue to have an impact after this time frame. Records of your bankruptcy will appear on the publically available Register of Insolvencies until two years after it has ended too.
Find out more about MAP here.
Debt Arrangement Scheme
If you live in Scotland and meeting your current monthly payments on your unsecured debts is a struggle, but you could afford to make a lower payment each month, the Debt Arrangement Scheme (DAS) may help. DAS allows you to continue making payments towards your debts, while making sure that you are left with enough money to cover essential living costs, including rent, mortgage, food, utilities and travel costs.
You’ll need to agree to a DAS Debt Payment Programme (DPP) with your lenders, which will outline how much you’ll pay towards your debts each month. This single, lower payment will be affordable for you and sustainable too. A DPP will also freeze any interest and charges as long as you adhere your side of the agreement. However, if your DPP fails, your lenders can reapply these charges.
There are consequences to take into consideration when it comes to DAS. For example, reducing your monthly repayments will affect your credit rating, making it harder for you to obtain credit and your details will be included on the publicly available DAS register.
Find out more about Debt Arrangement Schemes here.
A Trust Deed may be suitable for you if you’re not able to repay your unsecured debts within a reasonable amount of time. It’s available to Scottish residents and is a form of insolvency that allows you to repay as much of your unsecured debts as you can, usually over four years. Anything that’s left outstanding (that was included in your Trust Deed) at the end of that period will be written off.
As long as your lenders don’t object, you’ll make one monthly payment to your Trustee. They will then distribute the money out to your lenders for you. You will need to pay as much as you can towards your debts, but this amount will never be more than you can afford. It will take into account your essential living costs too, which includes things like your rent or mortgage, food, utilities and travel costs.
Trust Deeds do have consequences. For example, if you own your own home, you may be asked to release the equity in it to pay towards your debts. If this isn’t possible for some reason, your Trust Deed may be extended by up to 12 months. Your details will be recorded in the Register of Insolvencies, which is a publically available register. If you do not stick to the terms of your arrangement, your Trust Deed could fail and you may face bankruptcy.
Find out more about Trust Deeds here.
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