Topic 11 - Dealing With Debt

Question 1

what are 3 reasons people fall into debt?

Answer 1

• change in personal circumstances
• loss of job
• increase costs of mortgage

Question 2

what are 4 things people should do when in debt

Answer 2

• get free impartial advice
• use a budget to work out what they can repay
• negotiate with lenders amount affordable to repay
• increase they’re income, selling an asset such as a car

Question 3

What are 4 advisory organisations who may give free impartial advice on dealing with debt?

Answer 3

• money advice service
• stepchange debt charity
• citizens advice
• national debtline

Question 4

how can one increase their income to repay debt?

Answer 4

• taking on more work
• selling an asset
• claiming all the benefits they are entitled to.

Question 5

After working out what they can afford to repay of their debt after creating more income, what should they do next?

Answer 5

negotiate with their lender

Question 6

what are 4 ways people can change products in debt?

Answer 6

• with a good credit rating can switch credit card debt to another provider that does not charge interest, may have handling fee
• if struggling to pay off a loan could request an extension
• take out a long term loan to pay off the shorter term loan
• consolidation loan

Question 7

what is a consolidation loan?

Answer 7

one loan taken out to pay all the debts

Question 8

what should be considered before taking out a consolidation loan? (3)

Answer 8

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

Question 9

how should one prioritise paying off their loans?

Answer 9

• paying off the most expensive first

Question 10

what’s the best method of resolving a debt when having multiple different debts?

Answer 10

setting up a debt management plans

Question 11

where do debt management plans not apply?

Answer 11

mortgages and rents

Question 12

what is a debtor?

Answer 12

someone who owes money

Question 13

what is a creditor?

Answer 13

someone who is owed money

Question 14

what is a DMC?

Answer 14

debt management company

Question 15

what does a DMC do?

Answer 15

once paid for by the debtor, splits the money between the creditors

Question 16

What is an administration order?

Answer 16

a repayment plan

Question 17

who do administration orders apply to?

Answer 17

people who less the £5k in unsecured debt and at least one CCJ against them

Question 18

what is CCJ?

Answer 18

county court judgement

Question 19

what happens when an administration order is in place?

Answer 19

• individual applied for it to the court
• the court decides what the individual in debt can afford
• individuals pay one monthly repayment of an amount they can afford to the courts
• the court pays their creditor
• creditors can’t contact debtors or add interest to the debt

Question 20

how can a person be insolvent?

Answer 20

if they can’t pay their debt because it is greater than their assets.

Question 21

what are some solutions for insolvency? (3)

Answer 21

IVAs
Debt relief orders
Bankruptcy

Question 22

what does an IVA stand for?

Answer 22

individual voluntary arrangements

Question 23

what occurs in an IVA?

Answer 23

people hav reduced, affordable repayments for 5-6 years and then their debt is written off

Question 24

who does an IVA apply to?

Answer 24

those with unsecured debts that are larger than their value of assets

Question 25

who negotiates an IVA?

Answer 25

an insolvency practitioner - this is usually an accountant or lawyer

Question 26

What does DRO stand for?

Answer 26

debt relief order

Question 27

Who do DROs only apply too?

Answer 27

- owe less than £30k in unsecured debts - are not homeowners - have no more than £2k in assets, excluding a vehicle worth up to £2k - less than £75 a month left over after having paid living expenses

Question 28

What occurs in the 12 months debts are frozen in an DRO?

Answer 28

creditors can’t add any interest creditors aren’t permitted to contact the debtor to ask for payment

Question 29

what are 4 advantages of DROs?

Answer 29

- the household goods and tools of the trade are not just clouded in the asset calculation - it gives the debtor time to change their personal circumstances if they can, by increasing assets eg - debtors won’t be pressurised to repay during the 12-month period as their don’t wont grow - it is a cheaper insolvency solution than bankruptcy for people who have low incomes

Question 30

what are 2 disadvantages of a DRO?

Answer 30

- remains on persons credit history and public register thus difficult for them to borrow money during this time. - the cost of £90, although lower than other options can be difficult for people on very low incomes to pay

Question 31

What is bankruptcy?

Answer 31

A court order that means a persons assets are shared between their creditors who write off the remaining debt.

Question 32

How can one become bankrupt?

Answer 32

- People can apply to become bankrupt themselves - One of their creditors can apply to make them bankrupt

Question 33

What are 5 advantages of going bankrupt?

Answer 33

- debtors don’t deal with creditors directly - debts can be written off in 12 months - debtors keep certain possessions, such as a household goods, and an amount to live on - when over debtors given fresh start - creditors have to stop most types of court action to recover their money

Question 34

What are 10 disadvantages of bankruptcy?

Answer 34

- costs involved in the process - can’t apply for more credit while they are bankrupt - can only use a basic current account because they can’t go overdrawn - record remains on credit history for 6 years after he start of bankruptcy, difficult to obtain credit for 6 years - assets have to be sold to repay their debts - barred from certain occupations thus may loose job - if debtor owns a business, likely to be closed down and assests sold - details are published and may be reported in the media - if deemed that the debtor was uncooperative or had no intention of paying their debt, the order can last for 15 years.

Question 35

What are the 4 insolvency solutions in Scotland?

Answer 35

- debt arrangement scheme - trust deed - MAP bankruptcy - sequestration

Question 36

What is the debt arrangement scheme?

Answer 36

Very similar to the debt management plan but run by the Scottish government

Question 37

What is a trust deed?

Answer 37

- similar to an IVA - make repayments debtors can afford and after four years any outstanding debt is written off

Question 38

What does MAP stand for?

Answer 38

Minimal asset process

Question 39

What requirements must you have to be eligible to apply for MAP bankruptcy? (6)

Answer 39

- your on a low income - debts between £1.5k and specified higher amount usually £17k but raised temporarily to £25k due to Covid - not a homeowner - any vehicle owned is worth less than £3k - assets worth less than £2k - havnt been made bankrupt in last 5 years

Question 40

What is sequestration?

Answer 40

The term for bankruptcy in Scotland