Debt Management

Debt management companies are everywhere, advertising on TV, local radio and in the press. They will assist you in reducing your monthly credit payments to one affordable amount by negotiating on your behalf with your creditors – loan companies, credit and store card providers. The aim is to bring you relief from the worry that goes hand in hand with debt that is spiralling out of control. On the face of it debt management companies appear to providing a worthwhile service. Unfortunately there are a number of severe disadvantages with debt management plans.

• All your debt is still repayable and with an agreement to pay a reduced monthly amount, this debt will take even longer to repay in full.

• The agreements are not legally binding. They are nothing more than informal arrangements and can be broken by your creditors at any time. Your creditors can review the situation at any time and insist on increased payments or add additional charges and interest.

• The reduced amount that you are paying may only just be covering the interest and therefore not reducing your debt.

• Your creditors can still add interest and other charges although they may freeze these for a short period.

• Without the certainty of a legal agreement you will never really be sure what your creditors might do next. Demanding letters and phone calls may begin again.

Debt management companies will arrange for you to make one single monthly payment which they will distribute among your creditors. However they will take a % of the payment you make each month to your creditors as their fee, leaving less reaching your creditors than you had expected. They may also charge an upfront fee for setting up the debt management plan.

There are other alternatives to debt management that may be more appropriate, Individual Voluntary Arrangements (IVA) and Bankruptcy. Alternatively you may want to negotiate with your creditors yourself.

In recent years Individual Voluntary Arrangements (IVA), have become popular for people with heavy personal debt. This is a way of re-organising one's finances and reducing the stress that accompanies owing debts that are out of control.

IVAs are a formal agreement between your creditors and yourself to make reduced payments for a period of normally 5 years. After the agreed period you will have paid a % of the total debt and then be in a position where your accounts are considered settled.

An IVA is a legal arrangement under the Insolvency Act 1986 and has to be set up by a licensed Insolvency Practitioner. It is binding on both you and your creditors.

How does an IVA work?

The IVA is a proposal by yourself to settle your debts based on what you can afford. The payments proposed may be substantially lower than the total monthly payments due on all your accounts - loans, store cards, credit cards.

Once you have paid the final instalment the remaining debt is legally written off leaving you to make a fresh financial start. This may be as much as 65% of your total debts depending on your circumstances.

During the agreed period which is normally 5 years, all interest and other debt charges will be frozen.

To set up an IVA agreement will be needed from your creditors. They will be asked to vote either for or against the arrangement. Only one creditor needs to vote in favour for the arrangement to be approved. However they must represent at least 75% of your total debt.

For the IVA to be approved at least 75% by monetary value of your debt must vote in favour. Creditors who do not vote will be assumed to have been voted in favour of the arrangement.

If one creditor votes against the IVA and represents more than 25% of the total debt, the IVA will fail. If one creditor votes against but represents less than 25% then the IVA will be suspended for a later date and other creditors who did not vote will be called upon to vote.

If an IVA is thought to be the appropriate course of action for you, you will have to answer questions about your current financial circumstances which will form the basis of the arrangement. A repayment amount will be agreed with you and then forms will be completed for you to read and sign.

The Insolvency Practitioner will then make an application to the court for an Interim Order. Once this is in place all creditors will have to cease any further action against you. On the day of the hearing you may be asked to attend although normally being available by phone is sufficient.

What happens after the IVA is agreed?

Once the IVA has been agreed it is legally binding. Provided you maintain the payments at the end of the term of the IVA all remaining debts are wiped clear. Each month you will make one payment to the Insolvency Practitioner who is responsible for splitting this up for your various creditors.

Failure to make the payment will almost certainly bring the IVA to an end.

During the period of the IVA your arrangement will be reviewed in the light of any changes to your circumstances.

It is important to note that if you have an endowment policy or other type of savings plan you may be expected to cash these in and pay the proceeds into the IVA. Also if you own a property with a reasonable amount of equity you may be expected to release some of this (which may mean selling your home) during the term of the IVA normally at the end.

Property value and equity may be the make or break for an IVA. You will not want to be forced into a sale but your creditors may see it as a way of recovering more of what is owed.

Advantages of an IVA

• credit rating is improved & better than if declared bankrupt

• free of all debt after 5 years

• legally binding on all parties

• interest and other charges frozen

• no damage to professional status

• no further court action can be brought

• no more phone calls & letters from creditors

• one monthly payment

• private agreement with no publicity in local press your name will still on the insolvency register at www.insolvency.gov.uk/eiir/       

Disadvantages of IVA

• credit rating affected during the IVA term and for some time after

• lasts up to 5 years compared to bankruptcy which can be 1 year or less

• monthly must be made throughout the IVA term

• must include all creditors, no separate arrangements can be made

• no more unsecured borrowing during the IVA

• only available if total debt more than £12,000

• pay more back than if declared bankrupt

• some or all of equity in your home may be sought