11. Dealing With Debt

Question 1

How do people fall into debt?

Answer 1

• changes in personal circumstances
• lose job
• increase costs of mortgage - interest rates rise

Question 2

What should people do who are in debt?

Answer 2

• get free impartial advice
• use a budget to work out what they can repay
• negotiate with lender amounts they can afford to repay
• increase their income e.g. sell an asset (car) , over time

Question 3

Advisory organisations

Answer 3

• Money Advice Service
• StepChange Debt Charity
• Citizen Advice
• National Debtline

Question 4

Changing products to help with debts?

Answer 4

• individuals with a good credit rating can switch credit card debt to another provider that does not charge interest on balance transfers (there may be a handling fee)
• individuals who are struggling to repay a loan may extend the term of the loan - this increases overall cost though + there may be set up fees for new loan
• some borrowers may take out a long term loan to pay off a shorter term one

Question 5

What is a consolidation loan?

Answer 5

• a loan used to pay off several different debts
• e.g. credit cards, overdrafts etc.
• a monthly repayment is made to the loan provider

Question 6

What does an individual need to consider when taking a consolidation loan?

Answer 6

• full costs involved in the new loan
• must be able to afford the repayments on the loan if they are to clear their debts
• the overall cost must not be greater than the cost of the individual loans

Question 7

Prioritising

Answer 7

• individuals should prioritise loans for repayments
• they should pay off the most expensive first

Question 8

Debt management plans

Answer 8

• people who have lots of different debts may set up a debt management plan
• do not apply to mortgages and rent
• the person pays the debt management company each month who splits the money between those the individual owes money to
• this means the individual doesn’t have to deal directly with those they owe money to

Question 9

Are debt management plans free?

Answer 9

• free from most charities
• some organisations charge fees

Question 10

What is an administrative order?

Answer 10

• a repayment plan
• applies to people that have less than £5,000 in unsecured debt and at least one CCJ against them
• individuals can apply to the court + the court decides what the individual in debt can afford
• individuals pay one monthly repayments of an amount they can afford to the court + the court pays the creditors
• creditors are not allowed to contact debtors directly to ask for further payment + not allowed to add interest

Question 11

What is a debtor?

Answer 11

Someone who owes money

Question 12

What is a creditor?

Answer 12

Someone who is owed money

Question 13

What is insolvency?

Answer 13

An individual can’t pay their debts

Question 14

What are solutions for insolvency?

Answer 14

• Individual voluntary arrangements (IVA)
• debt relief orders
• bankruptcy

Question 15

Individual voluntary arrangements

Answer 15

• under an IVA people have reduced, affordable repayments for 5 to 6 years and then their debt is written off
• IVAs apply to those with unsecured debts that are larger than their value of assets
• an insolvency practitioner (usually a lawyer or accountant) negiotages with the creditor on the debtors behalf
• debtors make affordable repayments

Question 16

What is debt relief orders?

Answer 16

• allow people to write off their debts if they are unable to repay after 12 months
• applies to debtors who owe less than £30,000 of unsecured debt who are not homeowners
• have no more than 32,000 in assets and have no more than £75 a month after living expenses
• debtors must pay £90 to DROP + apply to the courts
• debts are frozen for 12 months
• stays on a persons credit history

Question 17

Bankruptcy?

Answer 17

• court order when a persons assets are shared between their creditors who write off the remaining debt within a given period of time e.g. 12 months
• official receiver is appointed who can can seek the persons assets and use any savings to repay creditors
• if the person still owes money after it is likely the debt will be written off
• bankruptcy fee of £7000

Question 18

Advantages of bankruptcy

Answer 18

• debtors do not deal directly with creditors
• debts can be written off after 12 months
• debtors keep certain possessions e.g. household goods, and an amount to live on
• when bankruptcy is over, debtors have a fresh start

Question 19

Disadvantages of bankruptcy?

Answer 19

• record remains for 6 years
• difficult to get credit for 6 years
• assets have to be sold to repay debts e.g. home, car, luxury goods
• cost of bankruptcy
• debtors can only use basic accounts they can go overdrawn
• if debtor owns a business, mostly likely to be closed down and the assets sold
• if the court considers the debtor have no intention of repaying their debts or did not co-operate with the official receiver the bankruptcy restriction could last 15 years

Question 20

Debt arrangement scheme?

Answer 20

• run by Scottish government
• similar to debt management plan

Question 21

Trust deed

Answer 21

• similar to IVA

Question 22

Minimal asset process (MAP) bankruptcy

Answer 22

• introduced in Scotland
• replaced the low income low asset option
• MAP allows you to write off debts you are unable to pay off in a reasonable time
• a fee is paid + debts are written off within 6 months

Question 23

What is sequestration?

Answer 23

• bankruptcy in Scotland