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Nicola Teader of Debt Free Direct tackles your debt headaches
DEBT WATCH
Q - I have been advised that overtime is to be stopped and my hours reduced for my public sector job shortly and have been told by my local Citizens Advice Bureau that Bankruptcy is the best way forward for me, given my debt situation, which can now probably only worsen. I am not sure about this. They say that an IVA is an expensive way of dealing with my debt and will see me paying more in charges, whereas Bankruptcy is an option that will only adversely affect life for a year. I have £15,000 of debt, excluding my mortgage and earn £23,000 a year. Please can you advise?
A - Bankruptcy is a serious course of action to take and, in line with government advice, should be taken only as a last resort once all other options have been considered. With £15,000 of debt an IVA may be a suitable option, if you have a sufficient monthly surplus once you meet your other financial commitments. Your query identified 5 main issues that need to be considered when considering the best course of action.
You work in the Public Sector
As you work in the public sector, there is a chance your job may be adversely affected by bankruptcy. Whilst the stigma attached to Bankruptcy has reduced considerably, there are still some professions and institutions who take a negative view of someone declared bankrupt. Without further details of your exact position it is difficult to advise whether you would experience any problems.
An IVA is expensive
It is correct that there is a cost involved in setting up and administering an IVA. However, there is also a cost involved in administrating a bankruptcy. The key point is that in the majority of instances, whether in an IVA or Bankruptcy, the costs involved are paid for out of the assets available. In an IVA, this would mean that the fees are deducted from the funds you make available to your creditors, not in addition to them.
In fact, in most instances due to the way fees and costs are charged in an IVA compared to bankruptcy, an IVA will more often than not provide the better return to your creditors.
Bankruptcy only lasts a year
It is true that you may be discharged from bankruptcy within 12 months. However, the consequences of going bankrupt can last significantly longer. If for example you have a surplus income, you may be required to pay into an Income Payments Arrangement/Order for 3 years. Furthermore, the Bankruptcy Order will be noted on your credit file and remain there for 6 years (the same period as an IVA remains on
your credit record).
The Official Receiver will also be required to interview you in relation to your debts. If the official receiver considers that a bankrupt has acted dishonestly, or is blameworthy in some other way, they will report the facts to court and ask it to make a Bankruptcy Restriction Order [BRO">. The court will consider this report and any other evidence put before it, and will decide whether it should make a BRO. If it does,
you will be subject to certain restrictions for the period stated in the order. This can be for a period from 2 to 15 years.
You are a homeowner
In Bankruptcy, all of your assets (with a few specific exceptions) will vest in your Trustee in Bankruptcy. This will include your home and as such the Trustee will make whatever arrangements are necessary to realise any equity within the property, including sale. Even if you jointly own the property with a partner or 3rd Party, the Trustee will have the power to realise your share of the equity.
In an IVA, you keep control of all your assets and simply make your best offer to creditors. This means you do not have to sell your home. In return for this your creditors will ask you to attempt to release equity by way of remortgage at the end of the IVA. Any remortgage is restricted to 85% of your property value so you will keep at least 15% of the value in your home. If a remortgage is not possible you will simply be asked to make 12 extra payments at the end of your IVA to compensate your creditors.
Is an IVA an option
Provided you have a monthly surplus available an IVA may be an alternative. The key points in comparison to bankruptcy to consider are:
You keep control of the assets making an offer to your creditors based on your specific set of circumstances.
An IVA is usually based on 5 years of Voluntary contributions plus attempted
remortgage. In bankruptcy there will possible be payments for 3 years but the
Trustee will take control of the property and possibly sell it. Both solutions will
remain on your credit record for 6 years.
The costs of the IVA are taken from the assets that you offer to your creditors, not in addition too.
An IVA is administered by a Licensed Insolvency Practitioner and is legally
binding on all of your creditors. It is clear that you are having difficulties with your debts and the key thing is to take positive action now to avoid the situation escalating out of your control.
Your best way forward is to talk to a specialist debt adviser, who has time to examine your specific financial position and has the expertise to guide you through the different processes. Once all the facts are known, your way forward will become much clearer and it may well be that you can choose a solution that allows you to remain in control.
A call to Debt Free Direct, the UKs leading provider of confidential and specialist advice on serious debt issues, is free and doesnt require an appointment. You will also be talking to a specialist debt advisor who has access to a team of Licensed Insolvency Practitioners.
You can call us on 0800 630 0714
After a discussion with one of our advisors you are under no obligation to act on any suggestions, unless you want to. Fees are payable only once a solution has been put in place and will be fully disclosed. Furthermore the fees are taken as part of the monthly payment you will be making into the solution; they are not an additional cost.
