Personal Debt Advice in the Credit Crunch
Declaring Bankruptcy or Individual Voluntary Arrangement?
Jan 24, 2009
It's almost impossible to turn on a television or open a newspaper these days without hearing or reading the words "credit crunch"; it’s an expression that has quickly embedded itself in the UK psyche.
Credit Crunch
For the lucky minority it’s simply a turn of phrase that has found its way into the English language. For these people, in financial terms, life goes on with barely a ripple to disturb it.
For some it means a tightening of the belt, fewer meals in restaurants, visits to the cinema or theatre and a rising awareness that household economies must be made, just in case.
However, for an increasing number of people in the UK it means real hardship: loss of employment, rising credit card debt levels and loss of the family home.
Recent statistics have made frightening reading. Although it came as no surprise, the United Kingdom, after two quarters of negative growth, is now officially in recession, the first time since the 1990s.
Credit Card Debt Relief
The Citizens Advice Bureau (CAB), experts in debt matters, have seen the numbers of people visiting their branches increase, particularly those who are struggling to make their mortgage or secured loan payment or people looking for credit card debt relief.
Debt Advice
CAB advice to those people is: “If you are falling behind with payments on a mortgage or secured loan you should speak to your lender straight away… Getting advice even at a late stage can help the majority of people come to a workable agreement.”
Many people who find themselves in an untenable position will declare themselves bankrupt or apply for an Individual Voluntary Arrangement (IVA). In Scotland the IVA equivalent is the Protected Trust Deed.
What are the advantages and disadvantages of these methods?
Advantages of Declaring Bankruptcy
- Bankruptcy is legally binding so individuals will know when they are going to be debt free.
- Individuals will be protected from legal action from creditors.
Disadvantages of Bankruptcy
- Any valuable assets including the individual’s home will almost certainly be sold.
- Bankruptcy will affect credit rating for six years.
An Individual Voluntary Arrangement (IVA) is a government solution to help people become debt free without going bankrupt.
Advantages of an IVA
- An IVA once agreed is legally binding so can’t be changed.
- A person pays only what can be afforded.
- Repayment period is normally five years.
- Credit rating can be repaired after the IVA is completed.
- The stigma of bankruptcy is avoided.
Disadvantages of an IVA
If three or more payments are missed the supervisors of the IVA can start bankruptcy proceedings against an individual.
- Valuable assets may be sold.
In Scotland, a Protected Trust Deed is a legal agreement between an individual and a Licensed Insolvency Practitioner.
Advantages of a Protected Trust Deed
- Like the IVA, having a Protected Trust Deed means that repayments are tailored to income and expenditure and normally last for three years. When the arrangement is completed the remaining debts are written off.
- All contact from creditors will stop after the Trust Deed is agreed.
Disadvantages of a Protected Trust Deed
- Valuable assets, including a house, may be sold to pay some of the outstanding debt.
- Credit ratings may take some time to repair.
This information, which comes from the reputable sources listed below, offers only a few of the advantages and disadvantages associated with each method. It is highly recommended that people who need further advice go to an organisation like the Citizens Advice Bureau, which offers free and independent debt advice.
Sources:
BBC
National Debt Relief
Government Debt Help
Citizens Advice Bureau
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