Getting Relief from Debt - A Good Example

At the beginning of 2007, the government announced that, in Britain, individuals had accumulated debts mounting to more than one and a quarter trillion pounds. It is anticipated that more than 68,000 people will have been forced to face personal bankruptcy. Statistics are easy to ignore – not so easy the stress of meeting the demand statements every month, knowing the total is going up, trying to pay the mortgage and trying to keep the family together.

Fortunately, most people who do get into money problems, realise their mistakes early enough, cut their spending and sort it out in time. But sometimes, maybe just by letting a couple of months slip by, things can get very bad, very quickly.

For the full time employed, with debts of less than (say) £15,000, there are schemes, called Debt Management Plans that can help. If all lenders and card providers agree, they can combine all their payments into a single monthly payment to clear their debt over the long term. If you are young, single and confident of your future earnings, DMP’s can work pretty well. Just, please, please, cut up the credit cards for the time being.

But if the debts are more than £15,000, you are going to need to earn a lot of money to get shot of your debts in less than 5 years. That’s a long time to wait, and if interest rates go up, the wait can get even longer, and you can forget buying a house anytime soon. Take the example of a single woman, call her Lisa, with £40,000 of debt, no house, an income of £20,000pa. Even by saving £400 a month (nearly a third of her take-home pay) it would take 9 years to pay off the debt, even if the interest was stopped completely!

For Lisa, the best option may well be bankruptcy. Since March 2004, the law has been changed to make bankruptcy much less of a burden. For most people the bankruptcy will be discharged in under a year. Yes, bank accounts may be difficult to retain and your credit rating will be affected for six years, but all the debts are cleared and within a couple of more years, it may well be as if it never happened.

But there’s a problem – suppose Lisa has a house and a family. Once off the property ladder, how easy will it be to get back on? In bankruptcy, any property you own, with few exceptions, will be lost. Even if there is a partner and young children in the house, the trustee in bankruptcy can force the sale of the property after just one year. For the homeowner, bankruptcy can turn into a tortuous process altogether.

However, there is an alternative. Providing Lisa has at least some equity left in the property, she can propose a voluntary arrangement with her creditors, whereby they agree to accept what she can afford from a remortgage on her property, writing off the rest completely. In Lisa’s case, as little as £20,000 might be all that’s needed, and the extra cost of the mortgage should be a lot less than her current payments to the card companies.

The critical thing is to act as soon as possible. Delaying a settlement will mean that interest costs rise and credit card lenders will tend to be much less amenable to IVA settlements if they have had to wait a long time for the offer.

To get an immediate indication of whether an IVA may be a viable option for you, complete our Self-Assessment Debt Test.


This article has been written for Relief4Debt, a division of Mercer & Hole, Chartered Accountants.  It should not be relied upon solely without further enquiry and/or detailed consultation with one of Relief4Debt’s suitably qualified advisors.