Debt Solutions
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You are not alone in this; we are there to help. Aristotle Financial Help can introduce you to trusted debt solution providers who offer tailored options for your situation. Contact our team today.
INDIVIDUAL VOLUNTARY ARRANGEMENT (IVA)
An Individual Voluntary Arrangement (IVA) is a formal agreement between you and your creditors to repay your debts over a set period. It can be structured based on your financial situation:
- Monthly Payments: Make monthly payments based on what you can afford, or
- Lump Sum Payment: Pay back a lump sum if you have access to the funds (no set up fees to be paid before your IVA is agreed).
*May not be suitable for all circumstances. Fees apply. Your credit rating may be affected.
Benefits
- Pay monthly amounts based on what you can afford.
- The remaining unpaid balances of your debts may be written off after you make your final payment.
- Interest, charges and debt collection stop meaning your debt amount does not increase during the IVA.
- An insolvency practitioner manage the IVA and communicates with your creditors on your behalf . Creditors included in the IVA cannot take legal action against you.
Risks
- Your creditors could request that you reduce your living costs to maximise your payments.
- You may be required to sell any valuable assets.
- If you own property, you might have to remortgage to release equity for the IVA.
- The IVA will be recorded on a public register and will impact your credit file for up to 6 years.
Debt Relief Order (DRO)
A DRO is a formal insolvency solution designed for individuals with low income, minimal assets, and relatively low levels of debt. It can help cancel your debts if your financial situation does not improve within 12 months. During this period, any interest and charges on your debts will be frozen, and you won’t need to make payments or deal with your creditors directly. However, you must meet specific eligibility criteria to qualify for a DRO, find out more here: https://www.gov.uk/guidance/how-to-get-a-debt-relief-order-dro
Benefits
- A Debt Relief Order is a formal solution, which means creditors included in the DRO cannot take legal action against you or chase you for payments.
- All debts in a DRO are typically cleared after one year, if your circumstances do not improve.
- During the 12 months that the DRO is in place, you will not be required to make payments towards the included debts.
- Interest and charges to debts included in the DRO are frozen for the 12-month period.
Risks
- A DRO will affect your credit rating and remain on your credit file for 6 years, which can significantly limit your ability to obtain credit in the future.
- A DRO may affect your employment, particularly if you work in certain professions (e.g. financial services).
- If your circumstances improve during the 12 months, (e.g. you receive a lump sum or increase in income), your DRO could be revoked, and you may be required to repay your debts.
- You must not have savings or valuable items worth more than £2,000
- It is a criminal offence to provide false information when applying for a DRO.
BANKRUPTCY
Bankruptcy is a legal process designed to help individuals who are unable to repay their debts. It can lead to the cancellation of most of your debts, giving you a fresh start. However, it involves a legal process and certain conditions must be met.
Benefits
- Debt collection, interest and charges on your debts will cease..
- Most debts can be written off after 12 months, subject to meeting the conditions of your bankruptcy..
- You may be eligible to retain essential household goods and some assets, depending on the circumstances..
Risks
- Your assets, including your home or car, may need to be sold to repay creditors.
- You may be required to make monthly payments from your income for up to 3 years, based on what you can afford.
- Obtaining credit will be challenging while you are bankrupt, as this will be recorded on the public register and affect your credit file for up to 6 years.
- Your bankruptcy may be extended if your financial situation changes or if you fail to meet the requirements .
- It could affect your current or future employment.
A bankruptcy application require fee costs £680, including thee application fee of £130 and the bankruptcy deposit of £550.
DEBT ARRANGEMENT SCHEME (DAS) – SCOTLAND ONLY
The DAS is a formal solution available in Scotland. It allows you to repay your debts in affordable monthly instalments based on your financial situation. During this period your creditors cannot take legal action against you.
Benefits
- You make one monthly payment to a DAS administrator, who distribute the funds to your creditors.
- No administration fee will be charged, all payment go directly to your creditors.
- Creditors included in the DAS must stop adding interest to your debts.
- Your monthly debt payments are reduced to an affordable amount, which helps cover essential living costs.
- You can keep your assets, including valuable items such as savings, vehicles and property.
Risks
- You may take longer to repay your debts under a DAS compared to making regular contractual payments. The length of the repayment period depends on your financial situation.
- While DAS helps manage debt, it will still affect your credit rating and be recorded on your credit file for up to 6 years, which can make obtaining credit more difficult.
- You must meet specific criteria, including having a minimum level of debt and proving that you can make the agreed payments.
- You are required to adhere to the terms of the DAS for its duration, failing to comply with the terms could result in the DAS being revoked and creditors taking legal actions.
PROTECTED TRUST DEED (PTD) – SCOTLAND ONLY
A PTD is a formal solution available in Scotland for individuals who owe more than £5000. It is a legally binding agreement between you and your creditors that allows you to repay what you can afford, and the remainder of your debt is written off once the agreement is completed.
Benefits
- You pay single monthly payments based on what you can afford.
- Interest and any additional charges on your debts are stopped once your PTD is accepted.
- A PTD includes most non-priority or unsecured debts such as personal loans, credit card debt, and some student loans and fines (note that student loans may not always be included, depending on the specific circumstances).
- Once your final payment is made, the remaining debts is written off.
Risks
- PTD is recorded on the public register of insolvencies for at least 5 years.
- This will remain on your credit file for 6 years from the date PTD starts, affecting your credit rating and making it harder to obtain credit.
- You may be asked to sell any assets valued over £1,000 to contribute to your debt repayment.
- If you own property, you might need to release equity from it to pay towards your debts.
- Items acquired through hire purchase agreements may be affected, and you might need to return these items or mane arrangement for their repayment.
SEQUESTRATION (BANKRUPTCY) – Scotland ONLY
Sequestration, commonly known as bankruptcy in Scotland, is a legal process that can help individuals who cannot repay their debts to write off most of the debts, giving them a fresh start.
Benefits
- Interest and other charges stop accruing once sequestration is granted.
- Creditors and Debt collectors must cease their efforts to collect payments from you.
- Most of your unsecured debts are usually written off.
- You are generally protected from further court actions by creditors once sequestration is granted.
- Professional trustees manage the sequestration process on your behalf, handling the administrative aspects.
- Essential household goods are typically protected, allowing you to retain necessary items.
Risks
- You may need to sell assets, including potentially valuable property, to repay creditors.
- You might be required to make monthly payments for up to 4 years, depending on your financial situation.
- Sequestration is recorded on the public register of insolvencies for at least 5 years.
- This will remain on your credit file for 6 years from the date it starts.
- It could impact your job, especially if you work in a role that requires financial responsibility or if your employment contract includes insolvency clauses.
- You’ll face restrictions when borrowing money, both during and after the sequestration period.
- It may be more difficult to secure a rental agreement, as landlord often check credit history and insolvency records.
MINIMAL ASSET PROCESS (MAP) – SCOTLAND ONLY
MAP is a simplifies form of bankruptcy designed people with low income with minimal assets. It is a cost-effective and straightforward procedure aimed at providing financial relief to those who qualify.
Benefits
- You do not need to appear in court to apply for MAP bankruptcy.
- There is no fee to apply for MAP.
- This process is usually complete within 6 months, after which most of your unsecured debts will be legally written off.
- Once this approved, your creditors cannot pursue you for payments or add further charges during this process.
- Most unsecured debts are included in MAP bankruptcy.
Disadvantages
- Your credit rating will be affected for 6 years.
- Your bank are likely to close or freeze your accounts, limiting you to a basic bank account during the MAP.
- This can affect your job.
- Some landlords may evict tenants or refuse to renew a tenancy agreement if they become aware of your MAP status.
- Certain debts, such as student loans, child support, and court fines aren’t included in MAP and must be managed separately.
- If you’re self-employed, obtaining credit for business purposes or services may become more challenging.
DEBT MANAGEMENT PLAN (DMP)
A Debt Management Plan (DMP) is an informal agreement between you and your unsecured creditors to repay non-priority debts. It involves consolidating your monthly debt payments to a single, affordable amount.
Advantages
- A DMP allows you to pay one affordable regular payment that is distributed among your creditors. If you have a fee-free DMP, all your payment goes directly to your creditors. If you opt for a fee-charging DMP, a management fee is deducted before your payment is distributed.
- Interest and charges on included debts may be frozen, but this is not guaranteed.
- It can help slow down direct creditor contact, as your DMP provider will handle communications and manage negotiations on your behalf.
- DMPs are informal and flexible. They are not legally binding, so you can leave the plan at any time if your financial situation improves.
Disadvantages
- Fee-charging DMPs may incur monthly fees that are deducted from your payment before it is distributed to creditors. Fees vary by provider.
- There is no guarantee that interest and charges will be frozen.
- Creditors can still contact you about payments and may refuse to co-operate with the DMP.
- A DMP may adversely affect your credit rating for up to 6 years , potentially limiting your ability to obtain new credit.
- Your debts will still have to be paid in full, though the monthly payments will be adjusted to a level you can afford. This may extend the term of your debt repayments.
RELEASING EQUITY (Homeowners)
Releasing equity in your property, either via a remortgage or a secured loan, involves you replacing or extending your existing mortgage, or taking out a loan against your property to borrow money. The released funds can then be used to clear your debts.
Advantages
- Equity released from your home can be used to pay off your unsecured debts, potentially consolidating them into a single payment. .
- Remortgaging might allow you to secure terms better suit your current financial situation. The monthly payment on a remortgage is often less than the combined total of your existing debt and current mortgage payments, easing the management of multiple debt payments. .
- Remortgaging may allow you to secure a lower interest rate than your current mortgage. .
- The interest charge for a secured loan is generally lower than unsecured credit agreements, which may lead to lower monthly payments. .
Disadvantages
- When remortgaging, you may incur an early settlement charge (‘Early Redemption Charge’) if you pay off your current mortgage before the end of its term.
- Your home is at risk if you fail to keep up with your mortgage payments. Additionally, while monthly payments may be lower when you consolidate unsecured debt into your mortgage, spreading payments over a longer term can result in paying more interest overall compared to keeping debts unsecured for a shorter term.
- You may not have enough equity in your property to pay off all your debts.
- Remortgaging to pay off debt could affect your ability to remortgaging or move to a new house in future. Interest rates may rise, potentially resulting in higher mortgage rates when remortgaging or buy in future
- Failure to maintain your mortgage payments can negatively affect your credit rating or credit score.