Debt is a growing problem for many people who are struggling to meet repayments in the face of growing utility, food and fuel prices and static incomes. No matter how stressful the experience, the sooner you face the situation you are in, the better off you will be in the long run.
There are many commercial organisations that offer debt advice, but they will generally either charge a fee (sometimes a proportion of your debts) or are selling consolidation loans. Some initial sources of free and impartial advice are the Citizens Advice Bureau www.citizensadvice.org.uk, the Consumer Credit Counselling Service www.cccs.co.uk, the Government-funded Community Legal Advice www.clsdirect.org.uk and National Debtline www.nationaldebtline.co.uk. There are also solicitors who specialise in bankruptcy and debt matters but if the debt is small, you are often best deal with it yourself or with the help of the above services instead of going to see a solicitor - unless, of course, you are faced with bankruptcy when it is important to have legal advice.
There may be a long queue of people waiting for appointments with their advisers, but they will be worth the wait. They can work out a plan to pacify your creditors, reschedule and repay your debts and will be able to tell you:
- if any of your credit agreements are unfair and therefore legally unenforceable;
- whether you are eligible for any social security benefits which might help; and
- which debts to prioritise. Rent, mortgage or any loans that are secured on your home should usually be tackled first, followed by council tax, gas or electricity bills and your television licence, failure to pay any of which can be followed by the loss of essential services, fines, a visit from the bailiffs or even jail. Other creditors, such as credit card companies and unsecured loans can apply for a county court judgment (CCJ), but they cannot take possession of your house and courts will usually give you time to pay them off, even if they record a judgment against you.
These organisations can also advise you on whether it is in your interests to enter into an IVA (Individual Voluntary Arrangement) or to file for bankruptcy.
This is the usual course of action taken by unsecured creditors against people who are in arrears with them, although they will usually attempt to recover the debt through negotiation first. Claims made through the county court are civil claims – they will not leave you with a criminal record – and the court will usually devise a timetable for you to repay the sums outstanding rather than demand immediate repayment. This does not mean that CCJs should be taken lightly however. As well as the stress of appearing in court, the court fees and other costs may be added to your outstanding debt, failure to comply with the court order can lead to a visit from the bailiff and your credit rating will be adversely affected, limiting your financial flexibility in the future. It is also important that you attend the hearing – if a judgment is made in your absence, it is likely to be much less favourable.
IVAs are sometimes marketed as a painless way to discharge a large proportion of your debt with relatively little comeback, but this far from the full picture. An IVA is an agreement between you and your creditors to settle a proportion of your debt (typically around 40%) within a fixed period (usually five years), after which the remainder is written off. However, the penalties involved with IVAs mean that, while they can be a good alternative to formal bankruptcy (because you will usually keep your most important assets, such as your house and your car) they are only suitable for those in the most serious financial situations. You cannot enter an IVA with regard to mortgage or council tax debt or Child Support Agency arrears and you will usually need both a stable income and assets, such as a property.
To set one up, you will need professional advice from a licensed insolvency practitioner – usually a solicitor or an accountant – who will approach your creditors to set up the IVA and monitor it once it’s up and running. Set-up costs are usually around £2500 and annual costs around £1000 per year.
Your creditors are not obliged to accept an IVA and there is evidence that they are taking a harder line with IVA requests as the number of applications grows. If your IVA proposal is accepted, your creditors may ask you to remortgage your house – reducing your equity – and contribute any savings (and any future windfalls) you might have. You may also be asked to stop any private pension contributions you are making. Missing a single payment will often invalidate the arrangement. You will not be able to take out any further credit during the life of your IVA (except to remortgage) and you will be limited to a basic bank account. Your IVA is matter of public record and will remain on your credit record for a year after the end of the repayment period, although you may be asked to declare it after this period.
You can apply for bankruptcy or your creditors (if you owe more than £750 in unsecured debt) can apply to the court to make you bankrupt. A bankruptcy order can still be made even if the debtor refuses to acknowledge the proceedings or refuse to agree to them. So it is in the debtor’s interest to co-operate fully once bankruptcy proceedings have begun. If the debtor disputes the creditor’s claim, he or she should try to reach a settlement agreement before the bankruptcy petition is due to be heard. Trying to do this after the bankruptcy order has been made is both difficult and expensive. On becoming bankrupt, you are freed from your debts, allowing you to make a fresh start, subject to some restrictions. However, your assets are shared out fairly among the creditors.
If a bankruptcy order is approved by the court, you must provide the Official Receiver with details about your financial affairs and may have to attend his or her office for an interview. The court will give you the address of the Official Receiver. You must give the Official Receiver a full list of assets and details of what is owed and to whom and hand over these assets, together with all books, records, bank statements, insurance policies and other papers relating to the bankrupt’s property and financial affairs. You must subsequently tell the trustee about any assets and increases in income you obtain during the bankruptcy. You will not be able to apply for credit of more than £500 without disclosing the fact that you are bankrupt.
When can bankruptcy be discharged?
Normally, you will be automatically freed from bankruptcy (known as 'discharged') after a maximum of 12 months. Most of your debts that have not been paid from your assets or income will be written off.
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