What debt solution is suitable for me? Financial checks and questions to ask.

Having completed your statement of affairs you can now try and get a general idea of the best debt solution for your situation. It’s important to take your time to get all the facts about the debt solutions available. Don’t hurriedly decide on a specific debt solution such as an IVA without learning the alternative debt solutions available to you. Also make sure you understand fully the repercussions of choosing a particular solution.

I suggest that, rather than waste time researching the details of a specific debt solution, you instead, first do the checks and ask yourself the questions I have outlined below:
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1. Check for Insolvency

   The first thing to check for is if you are insolvent or not. The definition of Insolvency is that you are unable to service your debts and you have insufficient assets to pay your debts. So, if you sold your assets, such as your house and car would you be able to settle your debts? If not, you are insolvent.

   • Insolvent: Bankruptcy or IVA?

     Okay. Let’s take the case that you are insolvent. In addition to not being able to settle your debts with your assets, do your monthly outgoings exceed your monthly income but by not much (you have say from zero to less than 100 pounds left over each month)? If so, you probably won’t be able to pay your debts and will have to consider bankruptcy. Follow the advice in the Bankruptcy section. However, if you do have some disposable income each month you might still be able to do an IVA.

2. If you have a Debt Problem but are not insolvent?

   Now let’s take the case where you are not insolvent. Remember you may not be insolvent despite finding that you have such a low disposable income that you cannot service your debts. From the fact that you are struggling with debt it does not imply that you are insolvent as the value of your assets could exceed the amount you owe.

   Remember if you are not insolvent you are not eligible for the IVA or Bankruptcy solution. You may need to either sell some of your assets, consolidate your debt or do a Debt Management Plan (DMP)

   • Example of someone who is in debt but who is not insolvent

     For example someone owing £40,000 in credit cards but who owns a house worth £80,000 is not insolvent. They can solve their problem by either

     • re-mortgaging or selling their house
     • increasing their income
     • consolidating their debt
     • Setting up a Debt Management Plan

 

3. Options to Consider: Debt Consolidation vs. Debt Management Plan (DMP).

   Debt Consolidation involves you restructuring your debt at a lower interest rate or over a longer term so that you pay less each month.
   A Debt Management Plan involves you informally agreeing with your creditors a reduced monthly payment towards your debt so that it is affordable.

   Both of these solutions can result in increasing the length of time it takes to pay off your debts.
   For example with a Debt Consolidation loan the payment term could be increased by years.
   In the case of a Debt Management Plan, you will be making reduced payments so it will take you much longer to pay off your debts. To get a rough estimate of how long in months it will take; divide your total debt by the monthly minimum payment.

4. Considering the IVA Solution
   If your debts are over £15,000, you want to retain control of your property and/or you belong to certain professions then an Individual Voluntary Arrangement might be for you. There are two types of IVAs; A “lump sum IVA” where you offer a lump sum to your creditors as a full and final settlement of your debts. You can raise this money from friends or relatives. A monthly payment IVA is as an arrangement with your creditors to pay off your debts by making a monthly payment for a period of 5 years.
   • Is a monthly payment IVA possible for you?
     You will need to have quite a high monthly disposable income. To get an estimate of how much you would require per month, do the calculation below:
     Divide your total debt by 4. Add 10K. Divide the total by 60. The resulting figure is an estimation of the minimum monthly payments that you would have to make towards an IVA. Obviously your monthly disposable income would need to be at least this figure or perhaps more.
   • Here’s an example. If the total debts are £60,000.
     £60,000 / 4 = £15,000
     £15,000 + £10,000 = £25,000
     £25,000 / 60 = £417
     Therefore the absolute minimum disposable income you would require to do an IVA would be £417. If your disposable income is under this amount it is very unlikely to be feasible.

 

5. Bankruptcy
   If you are insolvent and you think you have a long term financing problem you should be considering the bankruptcy solution. If you are insolvent but have high disposable income then even if you would rather the bankruptcy protection, you need to be aware that the court could ask you to do an IVA first. Also on being declared bankrupt, the court will appoint an Official Receiver who will take control of your assets. He can sell your assets and share out the money among your creditors.