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What are the alternatives to a Debt Management Plan?

Debt Management Plan | Guide

Debt Management isn’t the only debt solution that’s available. It’s important to be aware of all of the different options that could help you. Here are the alternative solutions – speak to a debt advisor as they’ll be able to advise which is the most suitable for your situation.

Bankruptcy/Sequestration

Bankruptcy/sequestration can be seen as a last resort for dealing with debt, but if you can’t afford to repay your unsecured debts in a reasonable amount of time, it can be the most suitable option for some people.

With bankruptcy/sequestration, you’ll only have to make payments if you can afford to. If you can, you will 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 and they can continue for up to three years (or four years in Scotland). You will usually be discharged within a year and whatever you can’t afford to repay will be written off.

There are consequences associated with bankruptcy/sequestration, for example, some of your assets may be sold to repay your debts and if you’re a homeowner, this can include your property. As with any default registered on your credit report, it will stay there for six years. Your credit rating will be affected during that time, and potentially beyond this period as you may be asked if you have ever been bankrupt when you make applications in the future. Records of your bankruptcy will also appear on the Insolvency Register until three months after your discharge, or on the Register of Insolvencies if you live in Scotland until two years after you’re discharged.

Find out more about bankruptcy here.

Find out more about sequestration here.

Debt Relief Order

If you live in England, Wales or Northern Ireland and cannot afford to pay back your unsecured debts in a reasonable amount of time, a Debt Relief Order (DRO) could offer a lower cost route into bankruptcy. It has strict criteria that you’ll need to meet – this includes having a limited level of income after all of your essential living costs have been taken into consideration. You also need to have few assets.

Once a DRO is agreed, you will stop making payments on your unsecured debts for 12 months, and, if your situation doesn’t improve in that time, all the outstanding debts included in your DRO will be written off.

There are consequences to a DRO – your credit rating will be impacted for at least six years from the date you start it and this will make it more difficult for you to obtain credit.

Find out more about DROs here.

Minimal Asset Process

If you can’t afford to repay your unsecured debts in a reasonable amount of time, the Minimal Asset Process (MAP) is a simplified form of bankruptcy for Scottish residents that could be a suitable solution for you. You need to meet strict criteria to be eligible for the scheme, which includes having no income left to pay your debts after paying for essential living costs and relatively few valuable assets.

Payments on these debts will be suspended for the period MAP runs for and any outstanding (included) unsecured debt will be written off if it’s successfully completed. It’s a shorter process than bankruptcy and you could be discharged in as little as six months.

As we mentioned, MAP is a form of bankruptcy, so 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 beyond this period. Records of your bankruptcy will appear on the Register of Insolvencies until two years after it has ended, which is a public register.

Find out more about MAP here.

Debt Arrangement Scheme

If you live in Scotland and can’t afford your current monthly payments on your unsecured borrowing, but you could afford to make a lower payment each month, the Debt Arrangement Scheme (DAS) could help. It allows you to continue making payments towards your unsecured debts, while ensuring you’re left with enough money to cover your essential living costs, such as your rent or mortgage, food, utilities and travel costs.

You and your lenders will need to agree to a DAS Debt Payment Programme (DPP), which outlines how much you’ll pay each month. This single, lower payment will be affordable and sustainable for you. A DPP freezes interest and charges on your debts, as long as you adhere to the terms of the agreement. However, if your DPP fails, your lenders can reapply these charges.

As with all debt solutions, there are consequences to take into consideration. For example, reducing your monthly repayments will affect your credit rating. It will show on your credit file for six years and this will make it harder for you to obtain credit. It will also appear in the publicly available DAS register while it is running.

Find out more about Debt Arrangement Schemes here.

Trust Deed

If you’re not able to repay your unsecured debts within a reasonable amount of time, a Trust Deed could help. It’s a Scottish form of insolvency that allows you to repay as much towards your unsecured debts as you can, usually over a four year period. Any included debt that’s left outstanding at the end of that period will be written off.

Providing your lenders don’t object, you will make one regular payment to your Trustee, who will distribute the money to your lenders after his/her costs. You’ll be expected to pay as much as you can, but never more than you can afford and it’ll take into consideration your essential living costs, such as your rent or mortgage, food, utilities and travel costs.

There are consequences to a Trust Deed. For example, if you’re a homeowner, you may have to release some of the equity in your home to repay your debts and if this isn’t possible, your Trust Deed may be extended by 12 months. Your Trust Deed will be recorded in the Register of Insolvencies, which is publically available and if you fail to stick to the terms of the arrangement, it could fail and you may face bankruptcy.

Find out more about Trust Deeds here.

Individual Voluntary Arrangement

On an Individual Voluntary Arrangement (IVA) you will pay back as much as you can of your unsecured debts, by making payments, usually over a five year period. These payments will be affordable for you and will take into account your essential living costs – this includes things like your rent, mortgage, food, utility bills and travel costs.

If you successfully complete your IVA, any outstanding unsecured debts included in it will be written off, and this includes any interest or charges that build up during the course of your Arrangement.

IVAs do have consequences – for example, if you own your own home, you may be asked to release some of the equity that’s in it during the last year of your IVA. If this isn’t possible, it may be extended for up to an extra 12 months. Whilst the IVA is running, and for three months after it has ended, your details will appear on the publically available Insolvency Register.

Find out more about IVAs here.

Debt Consolidation Loan

If you’re finding it difficult to manage your debts, but you feel you could get them under control if they were simplified, a debt consolidation loan could help you repay them at a reduced rate over a longer period of time.

It involves taking out new credit to pay off your existing credit, letting you combine your multiple existing debts into one manageable monthly amount, rather than lots of smaller ones, and it may reduce the amount you pay each month. However, as you’ll be repaying your debts over a longer period of time, it is likely that you’ll pay more overall.

Debt consolidation loans can be unsecured or they can be secured against your home. You need to be confident that you can afford the new repayments each month, especially if the loan is secured against your home, as missing repayments could result in the repossession of your property.

Find out more about debt consolidation loans here.

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