When you are struggling with Problem Debts, you will have a number of options for dealing with them.
Options are an important part of the Money Advice Process, as it is the options that we have available to us that allows us to deal with our problem debts.
In Money Advice, the options that Money Advisers can give their clients to help them deal with their Problem Debts, can be broken down into two broad categories. These are:
- Debt Management; and
- Debt Relief
It should be noted all Debt Management and Debt Relief Options can seriously damage you credit rating and can affect your ability to obtain credit in the future.
When Debt Management can help with Problem Debts?
Now Debt Management, as an option, is used to help people struggling with Problem Debts when they cannot pay their debts as they fall due, which means cannot make their monthly contractual payments.
So they cannot make the minimum payments to their credit cards or cannot make the monthly payments to their personal loans.
However, with a bit of breathing space from the people that they owe money to, they could repay their debts, or manage them, possibly by making reduced payments and repaying their debts over a longer period of time.
What is important is with that flexibility the person could repay all their debts in full, within a reasonable period of time.
When can Debt Relief help with Problem Debts?
Debt Relief is an option for people when, like Debt Management, they cannot repay their debts as they fall due, but unlike Debt Management, nor can they repay their debts over a reasonable period of time, even if they were to make reduced payments.
So when Debt Relief is used as an option to help people with Problem Debts, we are looking to have some of the debts written off, so they do not need to be repaid.
Debt Management Options
There are a number of Debt Management Options that can be used to deal with Problem Debts.
- The Debt Management Plan;
- The Debt Arrangement Scheme;
- Token Payment; and
- Informal Moratoriums.
The Debt Management Plan (DMP)
A Debt Management Plan, or as it is sometimes known as, the Voluntary Repayment Plan, is a plan that allows you to repay your debts to your creditors by making reduced payments over a longer period of time.
What is important about a DMP, is you need all your creditors to agree to it and to also agree to freeze all interest and charges and to stop all further recovery action.
Basically, if someone has 10% of your debt, then they get 10% of your disposable income to repay that debt each month. If someone has 20% of your debt, they get 20% of your disposable income.
The Debt Arrangement Scheme (DAS)
The Debt Arrangement Scheme is similar to the Debt Management Plan, in that it is also a repayment plan, where you repay all your debts.
However, unlike the DMP, the Debt Arrangement Scheme is a formal repayment plan that is provided for by Scottish Parliament legislation.
All interest, fees, charges and penalties are frozen by law if a Plan is approved and even if some Creditors object to it, it can still be approved if the Debt Arrangement Scheme Administrator (a senior Scottish Government Civil Servant) thinks it is Fair and Reasonable.
What is also important about the Debt Arrangement Scheme, is you are protected from Sheriff Officers executing Diligence against you whilst your are in it, and also you cannot be made bankrupt for any debts that are included into the Scheme.
Token Payments are a short-term solution for dealing with your debts.
Essentially, what you are saying to your Creditors, is I cannot repay my debts because my income is too low, but I hope my circumstances are going to improve and when they do, I will come back to you and make a reasonable offer.
In the meantime, you are asking your creditors to accept a Token Payment of possibly £5 per month, or £1 per month, as a good faith acknowledgement that, yes you owe them a debt and you will repay it when your circumstances improve.
Like with a DMP, however, Token Payments requires all creditors to agree and requires them to freeze all interest and charges to be effective. They also must agree to place your account on hold until you can improve your offer of repayment.
A Moratorium is like Token Payments, it is temporary solution.
Essentially, it is the same as Token Payments, but you are not even able to pay £5 or £1 per month. So instead you give a written acknowledgement that you owe the debt and when your circumstances improve, you will return with an increased offer that allows you to repay your debts within a reasonable period of time.
Informal Moratoriums should not be confused with Statutory Moratoriums, which are a different type of tool, that is used for other reasons.
Debt Relief Options
Debt Relief options are used when someone will not be able to repay their debts within a reasonable period of time and require some form of relief from their debts to get a fresh start or a new beginning.
Debt Relief options are:
Bankruptcy in Scotland, or Sequestration as it is called, can be both a Debt Relief option, or when creditors make you Bankrupt, a Debt Recovery Tool.
Money Advisers will only use Bankruptcy as a Debt Relief Tool.
It is used to give people a fresh start, because they cannot repay their debts within a reasonable period of time.
There are two types of Bankruptcy that people can apply for in Scotland. The first is a Full Administration Bankruptcy, when you have debts of £17,000 or more or more than £3,000 and own your home.
The other type of Bankruptcy is known as a Minimum Asset Procedure Bankruptcy and is used when you have debts of more than £1,500 and less than £17,000 and don’t own your own home or have savings of more than £1,000 (or assets of more than 2,000 in total).
When you are Bankrupt and can afford to pay something to your debts, you will need to make payments for up to 48 months, although you are only Bankrupt for 1 year, after which your debts are written off.
When you use the Minimum Asset Procedure, you don’t need to pay anything and receive a discharge after 6 months.
Your home or other assets may be at risk in a Bankruptcy, so you can only apply for Bankruptcy by seeking advice from a Money Adviser first or speaking with an Insolvency Practitioner.
Protected Trust Deeds
A Protected Trust Deed is another form of personal insolvency in Scotland and operates in a very similar way to Bankruptcy, but can be more flexible.
You must have debts of more than £5,000 to use a Protected Trust Deed and you must use a private Insolvency Practitioner (IP) to enter one, although a Money Adviser can usually refer you onto an IP.
You must be able to pay for at least 48 months to enter into a Protected Trust Deed, although you may have to pay for longer if you own your own home and want to protect your home or if you own a car and want to protect it.
Unlike Bankruptcy, the people you owe money to get a say and get to vote on whether it should be approved, so they usually will only agree to it providing it gives them a certain level of returns (usually 10p in the pound).
Unlike Bankruptcy, your debts are not written off until you have made all your payments, so it can be 4-5 years before you get debt relief.
Protected Trust Deeds can also fail, so if you don’t maintain your payments, it can be revoked and you can be given all your debts back, with interest.
Debt Write Offs
Sometimes Creditors will agree to write debts off is there is mitigating circumstances, such as an illness or bereavement and you are not likely to be able to repay your debts.
This won’t happen for secured debts like mortgages or loans secured over your home, but may be possible for consumer credit debts, like credit cards and personal loans.
Essentially, the Creditors may accept that your debt is not recoverable and it is through no fault of your own and your circumstances justifies, in their opinion, them giving you debt relief. This avoids you having to use formal personal insolvency to get that relief.
Debt Write Offs are best negotiated by independent Money Advisers, as lenders are likely to want evidence of the mitigating circumstances and proof that they have been independently verified and all options have been explored.
Alternatively, Creditors may not write the debt off, but state they will not recover the debt at this point, allowing them to keep their options open should your circumstances improve.
Full and Final Settlements
Full and Final Settlements are used usually when someone is in a position to make a lump sum payment to their debts, possibly using money that has been provided by a family member or a windfall, like an inheritance.
Basically, the Creditors are offered a percentage of their debt in Full and Final Settlement of the obligation.
How much Creditors will accept is entirely up them, but realistically most creditors are likely to be quite modest in the level of discount they give, particularly if they believe their may be other avenues open to them to recover the debt.
A Creditor may, therefore, accept 75p or 85p in the pound. So if you owed £1,000, they would maybe settle for £750 or £800.