Advice Centre Group

Debt Options Q&A

These are some of the most common debt options queries we receive at the Advice Centre Group, all collated in one place for your convenience.

Debt Options

Individual Voluntary Arrangements

An individual voluntary arrangement (IVA) is a formal and legally binding agreement between you and your creditors to pay back your debts over a period of time. It’s designed to help you manage your debts when they are unaffordable, by entering into an agreement with your creditors to repay all or part of your debt over the space of 5-6 years. You gain legal protection, providing you keep up your payments, and your creditors will stop chasing the debt and applying further fees and charges.

IVA providers charge fees (which are included in your monthly payments), failing can result in bankruptcy, it affects your credit file for 6 years (after which, it will be clear), creditors may not agree, you’ll appear on the Insolvency register, a public register of insolvency cases, a percentage of additional income may need to be paid in, you may be asked to release home equity if an owner.

During the application process, you IP will check your credit file and require proof of income, which will include bank statements, but once the IVA is in place, an IP generally wouldn’t need to check your accounts. This may change during your annual review if your IP suspects you’re not declaring something.

Due to IVAs lasting upto six years, recency plays a part here, many IVAs registered in 2018 or later are still ongoing so establishing a recent trend is difficult. The 42% peaks of 2007 are long passed, with affordability being a key factor. Data as at 31st December 2022 shows that 28% of IVAs registered in 2018, and 20% in 2019 have been terminated. IVAs that fail in the first year are rare and that’s why data from 2022 and 2023 is not yet available.

You are under no obligation to divulge your IVA status to partners, family or friends, however, your IVA with be on the Insolvency Register which is a public ledger that anyone can view. Your IVA may also need to be divulged when applying for financial products or certain jobs.

One of the main advantages of an IVA over a bankruptcy, is that your house is protected, providing your mortgage and IVA payments are maintained (mortgages cannot be included within your IVA).

There’s risk associated with all legally binding agreements, however, in the case of IVAs, the benefits generally outweigh the risks. If your IVA fails, your creditors may petition for your bankruptcy, if you work in a regulated industry, such as security or finance, an IVA may restrict your job search activity.

Your IP has a duty to your creditors to investigate any potential other funds that can be used to reduce what you owe, that can include HMRC.

Once all your incomings and expenditure are accounted for (not including creditor debts), providing you have more than £90 per month that you can afford to use to repay your debts through an IVA, you’ll be eligible for one, at least as far as income goes. It should however be highlighted that you’ll be expected to pay more if you can afford more. The base minimum would be £90 per month.

Generally speaking, a phone contract itself wouldn’t trigger the £500 credit limit, however, if your handset is part of the finance and would take you above the credit limit, it’s always best to speak to your IP before signing the contract.

Under most ciscumstances, within an IVA, you’re allowed to borrow upto £500 before notifying your IP. However, you should also be aware that this limit is cumulative, So if you’ve already borrowed a total of £499, you can’t apply for another £499 without notifying your IP

You can’t miss payments, or take out any credit over £500 without permission from your IP (insolvency practitioner)

Falling fouls of the terms of the contract, such as missing payments, not selling an asset previously agreed, or paying in a percentage of additional income you earn. These can all result in the IVA failing and your creditors potentially filing for your bankruptcy.

On an IVA, you’re free to go about your daily life, your IP should not deny you access to holidays, and having one can be a huge boost to your mental well-being. That being said, just ensure you pay your monthly payments and bills.

Your IVA repayment will be based on a number of factors, including your living expenses. Once your IVA repayments and any outstanding bills are paid, you’re free to use the money left however you see fit.

Once all your incomings and expenditure are accounted for (not including creditor debts), providing you have more than £90 per month that you can afford to use to repay your debts through an IVA, you’ll be eligible for one (subject to other criteria). It should however be highlighted that you’ll be expected to pay more if you can afford more. The base minimum would be £90 per month.

You are free to spend your money any way you wish once your repayment and bills have been accounted for. However, if you’re using finance to buy a car, please be aware that any credit over £500 will need to be signed off by your IP

Unfortunately, there is no such thing as a universal credit rating, and all lenders have different threshholds for what they consider to be a servicable debt, which will be based on a number of factors, including the credit rating at whichever credit reference agency they use. It’s likely that you’ll find it more difficult to pass a credit check than if you didn’t have an IVA, but by no means is it impossible and your IVA will be only one factor they use to offer you credit.

One (of many) advantage of an IVA is that creditors will stop chasing you for debt, this can mean a huge weight off your mind. My own favourite is that after the length of the IVA, you’re completely free of debt.

Providing your debts are not criminal debts such as unpaid court fines, or student loans or child support, they can generally be included within your IVA and your IP will contact the bailiff to get them to stand down.

There’s no maximum debt level for an IVA, they are designed for people owing over £5,000 but have no upper limit.

It is possible to exit an IVA early, for example, you may receive a windfall, such as a lottery win or inheritance. You should be aware though, that a windfall needs to be brought to your IPs attention as it’s considered an asset. The other way to exit early would be if a third-party, such as a friend, offered to pay your IVA off as a gift, this would not be considered an asset, and may allow you to pay off your IVA at an earlier date.

Debt Management Plans

A Debt Management Plan (DMP) is an informal agreement between your creditors and you, to repay your debts at an affordable rate.

After your six-year agreement, you will be debt-free. However, this is not based on the DMP itself, that’s based on how long a default or missed payment can stay on your credit file. The DMP is there to protect you and ensure you’re only paying what you can afford.

An overdraft is not considered a priority debt, and is mostly considered as unsecured. Therefore an overdraft can be included in a DMP. If you don’t include an overdraft in your DMP debts, you can feel free to retain your bank account. However, if you wish to include your overdraft in your DMP, then you will need to open a new bank account with a different provider.

One of the main disadvantages of a DMP is that your creditors will need to agree to it. As creditors usually have a number of other options to get their money back, so getting them to agree to it can be difficult. Additionally you’ll agree to repay 100% of your debt, which could take a significant length of time. Unfortunately, no debts are written off.

A DMP will stop bailiffs, providing they agree to it and don’t chase you for debts (which they actually are entitled to do under a DMP because it’s an informal arrangement). It won’t stop the bailiffs arriving to collect debts that are within the DMP either, such as priority or secured debts.

It’s possible you can still get a CCJ while under a DMP. As it’s an informal agreement, it can be stopped at any time by either you or your creditors. Additionally, some creditors may not accept the terms of your DMP and persue legal action regardless.

There’s no objective measure that letting agents use, and they’ll each have their own criteria for letting out property. Most letting agents will wish to perform a credit reference search and your DMP will appear on there, which may raise a concern on their part. However, a letting agent will use that as only one part of their decision-making process.

A DMP covers 100% of the debts included within it, so your income, expenditure and level of debt will define how long the agreement lasts.

As you’ll be repaying 100% of your debt to your creditors, if you were to come into some money, you can pay the DMP off early via a lump sum payment. Additionally, with the added flexibility of a DMP, if you get a raise at work, you can agree to increase your payments, thus paying it off earlier than originally agreed.

It’s usually set up within a few weeks, and there’s quite a few steps to take in order to get the DMP in process. Your Debt Advisor will explain all of this to you.

At the end of a DMP, your debts that were included will have been cleared off in full. Your credit file will reflect that and the accounts will be marked as closed. However, as you’ve only just settled the accounts, they will remain listed on the credit file for 6 years from the settlement date.

It’s possible to move from an IVA to a DMP, however, before making that decision, you should be aware that an IVA is a legally-binding agreement between you and your debtors. That gives you protection from bailiffs, as well as the creditor not adding charges and interest. If you exit your IVA, your IP will need to inform your creditors and they’ll be able to start chasing you for money you owe, as well as interest and charges.

Creditors, unfortunately, are not legally required to participate in a DMP, there are some that outright refuse, and others that may base a negative decision on their view that they are not getting enough money paid back to them. If your DMP has been rejected, contact us today for further advice.

As a DMP is an informal solution, eligibility criteria is quite loose. However, secured and priority debts can’t be part of a DMP. Utility bills, criminal or court fines and council tax debts, as examples, can’t be included. You must have unsecured, non-priority debts (no others are covered), you must also have a steady and stable form of income, which needs to be sizeable enough for your creditors to accept your terms.

Any secured debts, as well as priority debts cannot be included in your DMP. Examples of priority debt include (but are not limited to) utility bills, court or criminal fines, council tax debts, mortgage repayments or rent arrears, HMRC debts, child support and HP agreements.

Both solutions have positives and negatives and depend on personal circumstances. While a DMP is not legally binding, an IVA is, meaning that under a DMP, creditors can continue to persue legal action. Additionally, because no debt is written off, you’ll have to pay off the whole debt. Where that debt is substantial and your income low, it can take a long time to repay. An IVA also has a timeframe, but provided the IVA does not fail, it should be all completed within 6 years, and any remaining debt written off.

As a DMP is an informal agreement, either you or your creditors can stop the agreement at any time, at which point, your creditors are likely to resume legal action. There is no time limit to a DMP, like there is with an IVA, and they can run longer than 6 years if your level of debt is substantial and income low.

No. In fact, there are some debt you can’t include in your DMP (such as priority debt and secured debts). You may, for example, have a bank account that you don’t wish to change and decide not to include your overdraft in your debts covered by the DMP.

As a DMP is an informal agreement between you and your creditors, it shouldn’t have any affect on your employability. However, it will affect your credit rating, so if you’re working in a position of trust (such as security or finance), then it may be worthwhile to check with your employer.

Only where debts are shared, such as joint debts or financial products. This is known as “Financial Association”. Often, joint debts are on secured finance, such as mortgages, which wouldn’t be covered in a DMP. In the case of joint bank accounts, for example, any reductions in your payments may be reflected in your partner’s debts.

A DMP will appear on your credit file and may affect your ability to get credit. Each lender will have their own criteria for mortgages (and remortgages) so there’s no definitive answer for you, as many factors affect your creidt file.

A DMP will allow you to reduce your outgoings to an affordable amount, providing your creditors agree to it. It’s an informal and flexible agreement meaning you can negotiate with your creditors if you wish to raise or reduce your repayments. But there are also negative sides to a DMP, such as you have to pay 100% of your debts, your creditors have no obligation to stick to the terms, or even enter into the agreement at all. You can also only include unsecured, non-priority debts.

On a DMP, you do get enough money to live on and nobody tells you how this must be spent. So as long as you repay your DMP obligations as well as any bills you’re currently paying, what’s left over is yours, if you wish to spend this on a holiday, you’re free to.

A DMP doesn’t stop creditors taking action to get you to reduce or repay your debt. They can indeed ask to see your bank statements to ensure you’re not repaying an amount significantly smaller than you could be. During your application process, your debt advisor will also require bank statements, and there’s a legal requirement to review your DMP annually, at which point, you may be asked to provide up-to-date bank statements.

Debt Relief Orders

A Debt Relief Order (DRO) is a formal debt solution designed to help you clear your debts. It normally lasts for 12 months, and, if approved, allows you to stop making payments towards the debt (and any related interest) included within the DRO. After 12 months, you won’t have to pay the debts any more, however, the DRO does stay on your credit reference file for 6 years from the date it was approved.

A debt advisor will calculate your total debt, the value of your possessions and how much money you have left at the end of each month. In order to prove the need for a DRO, this will all need to be evidenced.

A debt advisor will calculate your total debt, the value of your possessions and how much money you have left at the end of each month. In order to prove the need for a DRO, this will all need to be evidenced, which could involve looking at your bank statements.

The level of debt needed for a DRO has no minimum limit (although it does have a maximum one of £30,000).

Yes, bailiffs can still come if your debts are not covered by the DRO. That being said, it’s a formal agreement, so bailiffs will back off for any debts covered by your DRO. If bailiffs arrive for a debt covered by your DRO, immediately contact your provider.

The Insolvency Service should make a decision on your case within 10 working days, so as much as you come prepared to your debt meeting, with evidence of your incomings, outgoings and assets, that will ensure you get it processed as fast as possible.

A DRO is based on your debt level, income, expenditure and assets. You wouldn’t be eligible if your debts amount to more than £30,000, your disposable income is over £75 per month, or your assets total over £2,000. You must also have not had a DRO in the last six years, are not currently subject to a bankruptcy, IVA or an interim order, and you must have lived or worked in England or Wales in the last 3 years. Finally, you must be a resident of England or Wales. Ineligibility for a DRO doesn’t necessarily mean you’re stuck and there may be other options out there for you. Speak to us for more advice.

Any creditor may object to the DRO being made, however, they can only do this on certain grounds, such as they don’t feel you’re eligible, however, they can’t object to being included on the DRO. If the creditor is covered on the DRO, you’re safe from them.

After 12 months on a DRO, your debt are effectively written off if your situation has not improved. You won’t receive any kind of formal ending notification. As your debt will be written off at this stage, these debts will appear on your credit file for 6 years from the ending date. That’s because all debts, unpaid or resolved, stay on your credit file for 6 years.

It may be more difficult to get a phone contract with adverse credit, but there’s no terms within the DRO that says you can’t get a contract. However, you should check with your adviser if the contract can be covered as expenditure, due to contracts often covering the cost of the handset as well as the service you receive from them.

It’s possible your bank account will be frozen under a DRO, this would be especially true if you have an overdraft as that will enter your DRO. If your account is frozen, you’re free to open an account with a different provider, however, it’s likely to be restrictive and you may only be eligible for a basic bank account.

There’s quite a strict criteria to be eligible for a DRO. You must owe less than £30,000 in total, your savings and assets (including vehicle, if you own it) must be below £2,000, you don’t have enough money at the end of the month to make your repayments. You must also have not had a DRO in the last six years, are not currently subject to a bankruptcy, IVA or an interim order, and you must have lived or worked in England or Wales in the last 3 years. Finally, you must be a resident of England or Wales.

During the duration of a DRO, there are a few things you can’t do, such as getting credit for more than £500 without telling the lender you have a DRO. You also can’t trade a business in a different name to the one in which you were given the DRO, without explaining the link with anybody you do business with. You also can’t be involved with promoting, managing or setting up a limited company without permission from the court. Finally, you won’t be able to act as a company director without prior permission from the court. Breaking any of these restrictions is an offence and could lead to a fine or imprisonment.

If your DRO is approved, you don’t need to pay anything to your creditors, and can use your disposable income as you wish. However, in practice, If you have over £75 of disposable monthly income, you wouldn’t be eligible for a DRO, so affording a holiday may prove difficult.

The criteria for a DRO is very strict and rejection is common. It could be that you don’t meet the minimum criteria or you didn’t provide further information requested. It’s also possible that the official receiver believes you haven’t been honest in your application.

If you have all your evidence ready to produce prior to getting debt advice, and if your debt advisor believes a DRO would be the best option, the application can be submitted in a matter of days. The Insolvencty Service then make a decision on your application and that will usually take around 10 working days.

A DRO is a form of insolvency, and as such, could affect your ability to secure a new job. If you’re currently in work and worried about what the effect will be, you’re best off talking to your employer. Some industries such as security, finance or legal may have restrictions on employees being insolvent.

A DRO and an IVA are both valuable solutions, really aimed at different levels of debt, so comparing them to each other is largely pointless, as eligibility for one usually negates eligibility for the other. A DRO will clear your debt sooner, but has very strict criteria, whereas an IVA will last longer, but has looser requirements.

Providing your vehicle is worth less that £2,000 or adapted to support a disability, it won’t count as an asset (but this only covers 1 vehicle) if you own it. If your vehicle is on HP, however, the situation is complicated. You don’t actually own the vehicle, so it won’t be counted as an asset, however, the maximum disposable income is £75 which doesn’t leave much room for HP, insurance and road tax, as well as your other living expenses. There may also be an insolvency clause within your HP contract, so you’ll need to check the terms.

Yes, it certainly can do. As a formal debt solution, insurers can consider you a higher risk, because you’re more likely to miss payments.

While it doesn’t specifically cancel the CCJ (if it’s already been issued) you will still be protected and they won’t be able to send bailiffs to collect the debt. A DRO will also prevent your creditors from taking you to court to get a new CCJ applied.

If your debt relief order is already in effect, a Universal Credit applicant can apply for any kind of advance, and is recoverable in full, as normal. If your advance was taken out before the start of the DRO, it will be included within the DRO as any other eligible debt would.

Bankruptcy

Personal bankruptcies are a way for individuals to deal with debts they can’t afford. It’s a formal agreement between you and your creditors, and is designed to let you make a fresh start, free from debt, while ensuring your assets are shared among your creditors.

There is certainly some social stigma around declaring bankruptcy. However, debt solutions are designed to protect you when you most need the help. In most cases, any shame you may feel about the bankruptcy, feels a lot better than the constant stress and worry of being chased for outstanding debts.

It does clear HMRC debts, however, as with all creditors, they’ll try to get as much money back through selling off your assets before the remainder is cleared.

If the debtor files for bankruptcy, the debtor is responsible for paying for the bankruptcy, so they’ll need to have access to £680 in order to proceed. If one of your creditors files for your bankruptcy, they’ll pay for it themselves.

Bankruptcy is probably the most severe of the debt solutions available to you, mainly due to the requirements to sell off assets in order for your creditors to get as much of the money you owe. In that respect, it can look scary and losing some of your non-essential assets may require adjustment on your part, however, the ultimate objective is to get you debt-free and for that, adjustments are necessary.

If a creditor is petitioning for your bankruptcy and you owe less that £5000 in total, it’s highly likely not to be successful. That minimum debt thresh-hold doesn’t apply if you’re applying yourself. You may also be denied bankruptcy if the Official Receiver feels you’ve not been open and honest with your application.

Yes, it’s perfectly possible, and it should be easier than your pre-bankruptcy spending habits. Be prepared to budget tightly, and follow practical advice for rebuilding your credit file.

Generally, unsecured debts are covered in your bankruptcy, debts such as credit cards, utility arrears, overdrafts, catalogue payments, store cards and overpayments of benefits. Debts generally not included are secured debts, fines and mortgages, as well as additional debts such as child maintenance arrears, student loans, court orders and TV licence arrears.

You’re right to be concerned about the recovery period after bankruptcies. Generally speaking, with a good recovery plan in place, the impact will be minimal. We’d advise you to monitor your credit report, avoid any further lines of expensive credit and follow a strict budget. Your credit file will take some years to recover, but with the right planning in place, you should have a clean file 6 years after the bankruptcy has ended.

It’s a case of different horses for different courses. They’re really designed for helping people at different stages of the debt process. So while there are some comparisons, such as being formal arrangements that are aimed at clearing your debt, they work in different ways. With an IVA, your assets are preserved and protected, whereas with a bankruptcy, they’re not.

Exiting bankruptcy does not immediately clear your credit file and once you’ve exited it, your debt commitments subsequent to the bankruptcy ending will define how quickly you can rebuild your credit. Unfortunately there’s no hard and fast rules and will depend entirely on your attitude to debt.

They are different things, unfortunately, so they can’t be compared. A CCJ can lead to a bankruptcy (if your creditors decide to attempt it) but it doesn’t work in reverse, a bankruptcy won’t lead to a CCJ. A CCJ is a judgement against you by the court and can lead to bailiffs visiting your home, whereas a bankruptcy is there to stop that happening (among other things). The only place where a CCJ and bankruptcy are comparable is the effect they have on your credit rating. They both remain on your credit file for six years. It’s also possible a CCJ will have a lesser impact on securing work if your industry is regulated.

It certainly can affect your current and future career path. Bankruptcies generally only affect regulated trades, such as security, legal or finance, but if you’re unsure, you should definitely check with your employer.

The process itself can be fairly stressful, you’ll have to evidence your incomings, outgoings, debts and assets and there may be a bit of back and forth while the admin is arranged. However stressful setting up a bankruptcy is, once you’re in it, you’ll stop being chased by creditors, and can look forward to a future free of debt, in time. That rather offsets the stress of filing for bankruptcy.

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We only provide advice after completing or receiving an initial fact find where the individual(s) concerned meet the criteria for one of our insolvency solutions, therefore, all advice is given in reasonable contemplation of an insolvency appointment.

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We provide solutions to individuals throughout the UK, specialising in Individual Voluntary Arrangements that comply with the IVA protocol