Credit Crunch

Options for debt management

When your debts become so large that you can’t control them anymore, there are a number of things you can do to manage the problem.

Let’s take a look at two of the options available to you:

IVA – an IVA is an Individual Voluntary Arrangement that is made between you and your creditors. It’s usually handled by specialist debt management advisors or consultants who call themselves Insolvency Practitioners. They will approach your creditors on your behalf and offer them reduced payments towards a portion of the original debt. The debt may be reduced by up to 65% as part of the agreement and whether the full amount is paid or not, the debt is considered settled after five years.

All your creditors are contacted and a repayment figure is offered to them that if they accept will then form your legally binding payment obligation for five years. In order for an IVA to be accepted the majority of your creditors must agree to it or else it could be refused.

You should be aware too that if you enter into an Individual Voluntary Arrangement with your creditors and you have an endowment policy with your mortgage, you may be expected to cash it in and pay the money you receive into the arrangement. Similarly, if your property has any positive equity, then some of it may have to be released to your pay off your creditors.

Bankruptcy is another option that many consider an absolute last resort but one which is becoming more commonly used in debt management. You can be made bankrupt in one of three ways:

• Voluntarily – The person in debt declares themselves bankrupt.
• Involuntarily - The creditors of an individual call for bankruptcy to be declared.
• The advisor or anyone bound by an IVA may call for bankruptcy proceedings.

A bankruptcy order can still be made against you even if you refuse to acknowledge the notice or refuse to agree to the terms of bankruptcy. You should therefore co-operate as much as you can once the proceedings have begun.

What implications are there to being declared bankrupt?

• You are no longer entitled to any claim on, or control of, your assets
• You can’t get credit over £250 without permission.
• You can’t be a company director.
• You can’t take any part in the formation of a limited company (LTD) without the express permission of the court.
• You can’t trade under any other name unless you inform all parties concerned of your bankruptcy.
• You can’t practice as a Charted Accountant or as a Lawyer.
• You can’t be a Justice of the peace.
• You can’t become a member of parliament.
• Your credit is affected for many years after the bankruptcy.
• Your bankruptcy will be publically announced.

Most of the above restrictions only apply for a limited time.

You may also be required to sell any and all assets that are in your name, however if for instance your house is in your spouse’s name, the court cannot call for it to be sold. The same goes for anything else that could be considered an asset.

If you are having severe financial difficulties you should always consult with one of the free and independent sources of advice such as credit counselling services or your local Citizen’s Advice Bureau.