THE DEBT ADVICE PROCESS
When you seek advice on possible debts solution from an advice agency, it can be a worrying time. It is a big step and understandably you may be worried. You may not know what reaction you will get, and you don’t know if the people you are seeking help from will be shocked or disapproving.
On top of that, there is the mystery surrounding the Debt Advice Process itself. What happens during it? What options are available to you?
In Scotland, money advisers have a variety of different solutions they can use to help you, when you are struggling with debt.
These can be broken down into two different catergories.
One is Debt Management and the other is Debt Relief
Debt Management is when you will be able to, or hope to be able to repay your debts in full, but need more time.
Debt Relief is when you will not be able to repay your debts and need relief from them.
Below, the main options are explained in more detail.
DEBT MANAGEMENT SOLUTIONS
Token Payment plans are used by Money Advisers when you are temporarily struggling to pay your debts, and have very little money, but are hoping things will improve soon.
Rather than looking at more severe options like Sequestration or a Minimum Asset Bankruptcy, your Creditors are offered Token Payments of between £1 and £5 per month.
This is not expected to repay the debt, but is an acknowledgement you still owe something.
In returns Creditors are expected to freeze all interest and charges and also stop all debt recovery action.
Token Payments are an informal arrangement, so require all your creditors to agree and are usually only for short periods of time.
An Informal Moratorium is similar to Token Payments.
It is supposed to be a temporary solution, when you have very little money to pay your debts, but are hoping your situation will improve, so want to avoid Sequestration or a Minimum Asset Bankruptcy.
Moratoriums ask your lenders to put your accounts on hold, and accept you will not be able to make any payments at this point.
They are also asked to freeze interest and charges and also stop all debt recovery action.
In return you acknowledge the debt and promise to begin payments when you are able to.
Moratoriums are not expected to be long term solutions, so if your situation, doesn’t improve, your Money Advisers will possibly discuss other options with you.
DEBT ARRANGEMENT SCHEME
A Debt Payment Programme under the Debt Arrangement Scheme is a voluntary repayment plan, but unlike other plans, has many benefits.
On approval a Debt Payment Programme freezes all interest and charges, protects you from your creditors and allows you to repay your debts at an affordable level.
It also stops Wage Arrestments.
You only make one payment per month, which a Payment Distributor uses to pay all your debts for you.
DEBT MANAGEMENT PLANS
Debt Management Plans (DMPs) are like the Debt Payment Programmes under the Debt Arrangement Scheme.
However, unlike the Debt Arrangement Scheme, they are informal arrangements, so require your lenders to agree to them and also to agree to interest and charges being frozen.
Another way in which DMPs are different is they don’t always treat Creditors the same, so some may receive more than other Creditors, if they classified as Priority Creditors.
However, like with the Debt Arrangement Scheme, a DMP aims to repay someone’s debt back in full, so are not a type of personal insolvency.
They are also flexible, so payment amounts can be increased or reduced as your circumstances change.
Statutory moratoriums are a temporary solution that only last six weeks.
On there own they don’t address you debts problems, but provide you with six weeks protection from creditors so you can consider all other options, including the Debt Arrangement Scheme, Trust Deeds and Sequestration.
However, you can only use a Statutory Moratorium once in any 12 month rolling period, so it is important to do so with caution, and only after you have sought advice.
TIME TO PAY DIRECTIONS/ORDERS
Time to Pay Directions and Orders do give you time to repay a debt, but can only be applied for once a lender has taken you to Court.
However, they can provide you with time to re-pay a debt, even when a Creditor has a Court Order against you.
You can only apply for one, however, if you have not previously applied for one for the same debt.
Time to Pay Directions and Orders are applied for via the Sheriff Court.
DEBT RELIEF SOLUTIONS
Sequestration is what Bankruptcy is known as in Scotland.
You can apply for Bankruptcy yourself, but first you have to obtain advice from a Money Adviser or a Licenced Insolvency Practitioner.
Sequestration is awarded by the Accountant in Bankruptcy, or the Court (where a creditor makes you bankrupt). All your debts and assets then become the responsibility of your Trustee, who may require you to pay a monthly contribution to your Bankruptcy, for up to 48 months.
If you have a Wage Arrestment, this is stopped once your Bankruptcy is awarded.
At the end of your Bankruptcy, you liability for your debts comes to an end, with some exceptions.
PROTECTED TRUST DEEDS
A Protected Trust Deed, like Sequestration, is also a type of personal insolvency.
When you grant a Trust Deed , you must do so with a Licenced Insolvency Practitioner.
They then take responsibility for all your asset and your liabilities and deal with your Creditors for you.
If you have an Earnings Arrestment, then this comes to an end once your Trust Deed is protected.
A Trust Deed is protected five weeks after the creditors are notified by the Trustee and providing enough creditors don’t object to it.
The Accountant in Bankruptcy also have to agree to register it.
You will have to pay something to your Trust Deed, usually for 4 years, but sometimes 5.
When you receive your discharge from your Trust Deed, your liability for your debts comes to an end.
In certain circumstances, Lenders may be prepared to consider writing off debt in part or in full.
This can happen for a number of reasons. You may wish to request a Write Off of some of your debt as you are able to make a lump sum payment in full and final settlement.
Alternatively, you may request your debt is written off in full because of your circumstances and it is not likely you will ever repay it.
Writing off debt is never a decision a lender takes lightly, but they will consider it if the circumstances of your case merit it.
MINIMUM ASSET BANKRUPTCY
A Minimum Asset Bankruptcy (MAP) is a special type of Bankruptcy for those on low incomes and with little assets.
A MAP is cheaper to apply for (the application fee is only £90), but your debts must be at least £1,500 and no more than £17,000.
You also cannot own your home and you must be in receipt of certain social security benefits or be deemed unable to pay anything to your Bankruptcy.
If a MAP is awarded, then providing your circumstances don’t improve before you are discharged, your debts can be written off in six months, although some other restrictions may still apply for another six months.
To apply for a MAP you must first seek the advice of a Money Adviser.