Options for Individuals in Debt
Individuals in debt have several options available to them. These include both informal and formal repayment arrangements
Informal Repayment Arrangements
– Informal Arrangement
An informal arrangement is a non-binding agreement between the individual and their creditor(s). It is not legally enforceable and is not formally documented. The individual agrees to make regular payments over an agreed period, based on what they can afford.
– Debt Management Plan (DMP)
A DMP is an informal agreement managed by a third-party debt management company. While not legally binding, meaning creditors may still take legal action, it allows the debtor to make a single affordable monthly payment, which the debt management company then distributes fairly among the creditors.
To qualify for a DMP, the individual must be able to contribute at least £5 per month and be in a position to repay their debts within 10 years.
Formal Repayment Arrangements
– Bankruptcy
Individuals can apply for bankruptcy if they are unable to repay their debts. The bankruptcy period typically lasts for 12 months, during which time creditors are not allowed to contact the individual to pursue repayment. Most debts are written off at the end of this period.
– Debt Relief Order (DRO)
A DRO is suitable for individuals who owe £50,000 or less and have minimal assets and disposable income. It offers a way to freeze debts for 12 months. If the individual’s financial situation does not improve during this period, the debts are written off. However, the DRO will remain on the individual’s credit file for six years.
– Individual Voluntary Arrangement (IVA)
An IVA is a formal, legally binding agreement between the debtor and their creditors. It allows the individual to repay a portion of their debts over a fixed period, usually five to six years, based on what they can reasonably afford. Once the IVA is successfully completed, any remaining debt is written off.
