Get impartial, independent advice from leading debt charity, the CCCS, on how to take your first steps to get out of debt.
As previously mentioned, a thorough budget proves to creditors your income, essential spending, and how much of your debts you can repay, if at all.
- Adopt our goal: Draw up a budget
If your unsecured debts outweigh your assets, and repayment is not realistically possible, you may need to consider insolvency.
In England, Wales and Northern Ireland, three forms of insolvency exist: bankruptcy; individual voluntary arrangements (IVA); and debt relief orders (DRO). CCCS is one of the few approved organisations that offer DROs.
Bankruptcy
- Creditors can write the debts off. There is a fee of £510 – out of this, £150 will go to the courts and £360 to the official receiver (increasing to £450 in April). You may be exempt from the court fee if you have a low income or receive benefits. Bankruptcy normally lasts a year. You cannot take further credit, and may have to sell valuable assets, but keep things for day-to-day living.
Debt relief orders
- A cheaper alternative to bankruptcy that costs £90, DROs help people in severe financial difficulty with low incomes. You must have less than £15,000 in unsecured debts, not be a homeowner, have no more than £300 worth of assets (although one car up to £1,000 in value is exempt), and have less than £50 surplus income each month. Debts are frozen for twelve months, and creditors agree not to pursue you or add interest. If, after one year, reasonable monthly repayments are still unrealistic, they are written off.
Individual voluntary arrangements
- A legally binding arrangement between you and your creditors, committing you to affordable monthly payments over a fixed term (usually five years), paying back an agreed percentage of your debts. If you keep to the arrangement, your creditors will not chase you, or add interest. IVAs must be arranged by an Insolvency Practitioner, who will draw up a proposal, liaise with creditors, and support you throughout. Most IPs charge fees.
Scottish laws
Scottish insolvency laws differ from the rest of the UK, though similar provisions are available; sequestration replaces bankruptcy, trust deeds replace IVAs, and low-income-low-asset sequestrations (LILAs) replace DROs.
Sequestration
- You must owe £1,500 or more, live in Scotland or have lived in Scotland during the last year, have not been made bankrupt in the last five year, and pay a £100 fee. You can only apply for sequestration if: a creditor has obtained a decree and has had a ‘charge for payment’ served on you, or; a creditor has obtained a ‘summary warrant’ against you for the recovery of rates or taxes and your goods have been subject to an attachment or an exceptional attachment order, with 14 days passing without payment being made.
LILA
- You must receive no more than the standard national minimum wage for a forty hour working week (equivalent to £232), have no single asset worth over £1,000 or total assets over £10,000, and not own or jointly own a house or any other property or land.
Trust Deed
- A legally binding arrangement between you and your creditors, agreeing fixed affordable monthly payments, usually over a three year term. Trust deeds are protected from payment-chasing and interest, and prevents court action. Deeds must be arranged by an Insolvency Practitioner, known as a trustee.
Insolvency is a big step to take, and you should always seek impartial expert advice from free organisations such as CCCS before choosing this route. They can help you through the processes and make sure you fully understand the consequences.
You can contact CCCS via the charity’s freephone helpline (0800 138 1111), 8am to 8pm Monday to Friday, or by using its twenty-four hour, anonymous online counselling system Debt Remedy (www.cccs.co.uk).