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What Is A Formal Debt Solution

If you are facing personal debts that have become difficult to manage, you could seek a formal debt solution to help.  There are different options available to help you clear your debt, including formal and informal agreements. Typically, a formal debt solution includes entering into a legal process to seek relief from your debt.  Which type of debt solution you choose depends on your circumstances. So what is a formal debt solution?

  • Formal Debt Solution Options
  • Bankruptcy
  • Debt Relief Orders
  • Individual Voluntary Arrangments
  • Administration Order
  • Informal Debt Solutions

Formal Debt Solution Options

The main formal debt solution options include;

  • Bankruptcy (Voluntary and Involuntary)
  • Debt Relief Orders (DRO)
  • Individual Voluntary Arrangements (IVA)
  • Administration Order (AO)

Bankruptcy

There are two main ways in which you can be made bankrupt. Firstly, you can apply for bankruptcy yourself if you can’t pay back your debts, this is a debtors petition or voluntary bankruptcy. Or, a creditor can ask a court to make you bankrupt, even if you don’t want them to.  This is a creditor’s petition or involuntary bankruptcy.

Voluntary Bankruptcy

Anyone can apply for voluntary bankruptcy, there isn’t a minimum amount of debt to be eligible for it, but you will have to demonstrate that you are unable to pay your debts.

However, it is a very serious legal process, hence you may want to look at all other options for dealing with your debts before considering this option.

The consequences of bankruptcy can have a big impact on your life. For example, your bankruptcy status will stay on your credit report for several years. It will be public knowledge, and employers may be entitled to check your credit report before hiring you. 

Ultimately, bankruptcy is one solution to clearing your debt. If your unsecured debts total more than the things of value you own, then bankruptcy is an option for you, but seek professional advice before taking this step. 

Involuntary Bankruptcy

Involuntary bankruptcy is when a creditor or group of creditors ask a court to make you bankrupt without your consent.  A creditor can only do this if you owe at least £5,000.  Furthermore, they must go through a certain process which includes sending you an official document giving you 21 days notice before taking the next steps. 

If the court declares you bankrupt, you will be required to cooperate with the Official Receiver for the duration of your bankruptcy  (usually 12 months). 

Debt Relief Orders (DRO)

As an alternative to bankruptcy, you could apply for a debt relief order, known as a DRO.  A DRO lasts a year unless your situation improves before then. It’s also a legal process to apply for a DRO which will come with terms and conditions that you must stick to. 

There are strict criteria to meet in order to apply for a DRO, these include;

  • You must not be a homeowner
  • Your debts must be £30,000 or less
  • You must not have a car worth more than £2,000
  • Any assets or items of value you have must be worth less than £2,000.
  • You must not be able to afford more than £75 per month towards your debts. 
  • Finally, you can’t have had a DRO in the past 6 years. 

Ultimately, a DRO is one way to be discharged from your debts if you are facing serious financial difficulties and you can’t pay back your creditors.  To apply for one, you need to speak to a special DRO adviser who will help you fill in the application to send to the Official Receiver.

Individual Voluntary Arrangement (IVA)

An individual voluntary arrangement, or IVA, is a formal legal process, like bankruptcy or a DRO. 

However, unlike a DRO, any amount of debt can be included in an IVA, so it can be more flexible to suit your needs. The fees for an IVA can be expensive. In order to apply, you must contact an Insolvency Practitioner. They will charge fees for their work.

In simple terms, you will work out a repayment plan with your insolvency practitioner which could be in monthly payments or a lump sum, or both.  Your repayments are based on what you can reasonably afford and typically, an IVA lasts 5 or 6 years. Repayments are paid to your insolvency practitioner who deals with your creditors on your behalf.  Some of the money will go towards their fees. 

It’s worth bearing in mind that your creditors still need to agree to the IVA, so if they don’t, you may need to look at other options. 

Administration Order (AO)

Another formal debt solution is an administration order, which is dealt with directly by an administrator appointed by the court.  

To get an administration order or AO you must have:

  • debts that are no more than £5,000 in total
  • an unpaid county court judgment (CCJ) or high court judgment
  • two or more debts

Ultimately, the court will look at your financial situation and tell you how much you should pay each month. These repayments go directly to the court who will then pay money to your creditors on your behalf.  You must list all of your creditors, but they can object to being included. 

There’s no upfront fee as the court keeps 10% of your monthly payment to cover costs.  To apply, you can fill in a form from the government website and hand it in to the court yourself. 

Informal Debt Solutions

There are informal solutions if you wish to avoid the formal solutions. Choosing the right debt solution depends on your current circumstances, including how much money you owe and if you can afford regular repayments.  You should look into all of your options before making an informed decision.