There are many ways of dealing with debt. Here we take a look at three of the most effective debt solutions to provide a quick but thorough overview of how they each compare and some of the key differences between them.
The three debt solutions are:
A debt arrangement scheme is a longer-term arrangement and differs radically in that it requires you to pay back all of your unsecured debts. It can be for a period of up to 10 years or so, depending on your ability to pay, but it can be for a much shorter time than this too of course. It’s all about affordability.
DAS is a good way of protecting property and assets. The term can be shortened too if you get a windfall or find you have extra income with which to pay off your debts sooner.
A protected trust deed is a legal arrangement that involves you paying down your debts gradually over a period that normally lasts between 4 and 6 years. The good thing about this arrangement is that anything you still owe after this period has elapsed is simply written off – leaving you debt-free.
It’s important to note though that entering a protected trust deed is to declare that you are insolvent.
Bankruptcy is of course also insolvency. When you enter into bankruptcy then you really do take on something that has many implications for your future. It does, however, allow you to clear your debts quickly – usually within a 12-month period.
Anything else you owe after that time is simply written off and you are completely debt-free, though a contribution may be required for a further 3 years after discharge, if you are in a position to make one. Bankruptcy does have implications though as outlined below.
To qualify for a debt arrangement scheme and a debt payment plan, you simply need to have one or more debts that you are struggling to pay back.
You do have to demonstrate that you have enough spare income to repay your debts. Incidentally, like a protected trust deed, you have to be resident in Scotland to get a DAS.
To be considered for a trust deed, you need to owe £5,000 or more. You also need to be resident in Scotland.
You can apply for bankruptcy if you owe more than £3,000 (£1,500 under Minimal Asset Process); You can make an application provided you have made bankrupt in the preceding 5 years.
Two of the solutions involve handing over control of your affairs to a trustee. This is a big step, but part and parcel of the arrangements around a protected trust deed and a bankruptcy.
In each of them, a trustee is appointed to manage all your financial affairs and provide protection against your creditors as part of this.
All three options provide legal protection from your creditors taking further action against you, provided you fulfil your obligations that you have made with them.
Principally, that entails making the affordable payments you have agreed under each arrangement for the term of the agreement and meeting any other obligations you have entered into.
All of the debt solutions mean that you do not have to deal with creditors directly.
In a debt arrangement scheme, your money adviser acts on your behalf and deals with all your creditors. This involves setting up a debt payment programme (DPP) that satisfies the requirements of your creditors. As part of this, your money adviser will deal not only with your creditors, but also with the Accountant in Bankruptcy (AiB) who administers the debt arrangement scheme on behalf of the Scottish Government.
It is important to note that, although the scheme is administered by the AiB, you are not declaring yourself insolvent: instead, you are agreeing to pay back your debts in an affordable way and over a period of time.
Under a protected trust deed arrangement, your trustee communicates with all of your creditors with regard to ensuring its protected status. Your trustee will deal with and negotiate with your creditors to try to secure sufficient agreement. They will also deal directly with the AiB on your behalf.
Under a bankruptcy, your insolvency practitioner, who is also usually appointed by you as your trustee, is responsible for dealing with your creditors. The insolvency practitioner will complete your application for bankruptcy to the AiB who oversees insolvencies in Scotland.
Under a debt arrangement scheme, a major asset, such as your home, is protected. This is an especially important consideration if you have a high level of equity in your property and you do not want to sell your home or cannot sell your home for family reasons, for example. You may of course have other assets such as a car(s), but they too are protected by a DAS – provided that you continue to make payments under your debt payment plan.
A Trustee in a protected trust deed will review the equity position you have in your home, with a view to realising a value for your creditors. This does not usually require your home to be sold. You can also generally keep your car, unless it is especially valuable.
In bankruptcy, the position is similar to that of a protected trust deed as noted above.
A debt arrangement scheme is a good way to get on top of your debts and pay them back in affordable payments. Interest and charges are frozen and written off at the end of your debt payment programme. It gives you the chance to pay back the amount that you owe without the potential consequences of being insolvent.
A protected trust deed can be a good way of dealing with unsecured debts such as credit cards, council tax etc, especially if you are finding it difficult to pay for everyday expenses such as food and utilities to be able to make payments – or you are consistently missing payments as you don’t have enough money at the time to make a payment.
You will be required to make affordable payments to your protected trust deed, so it’s important that you have a regular income to be able to sustain it. Not making regular payments could lead to the protected trust deed failing and therefore bankruptcy.
Bankruptcy is a drastic step to take, but it can be the right one in certain circumstances. You may find yourself taking out cash advances on credit cards regularly or missing payments and finding your interest rate is increased by lenders as a result.
You may also have taken on other work to try to get the money together to make payments to your creditors – and yet you may still be finding it hard to pay your debts and make ends meet.
Just as important as any of these considerations are the effects on your home and work life: the chances are that they will be suffering too, and that could bring even more problems.
If your debts are completely unaffordable and you can’t pay them back, then bankruptcy may be the right way to go.
All of the debt solutions will have a negative impact on your credit rating; but it is highly unlikely that you would want credit if you are in one of them. In the longer term, and once you have worked through them, there is a real opportunity to rebuild your credit profile on solid financial foundations.
In terms of banking, you will still be able to have a bank account. A debt arrangement scheme should involve no changes to your banking arrangements if you already have a basic bank account.
However, if you have an overdraft facility on your account the overdraft will have to be included in your DAS, so you will not be able to maintain this account. You can, however, open a new basic bank account with another lender. You will also be unable to get an overdraft facility if you are in a protected trust deed.
If you are in bankruptcy, your current bank may put a temporary freeze on your account, close your account or withdraw your overdraft facility. If you are applying for bankruptcy, then it is best to open an account with another bank (one to which you do not owe any money) before you declare yourself bankrupt.
As a protected trust deed and bankruptcy are insolvent events, there could be some serious implications for your employment. You should check your contract of employment if you are thinking of entering into either of these procedures.
Bankruptcy restrictions have more of an impact on you. You would be unable to hold a public office nor would you be able to be a director of a limited company without leave of the court. It can also mean that you may not be able to work as a professional in areas such as the legal and financial sectors. As with everything, you need to be clear about all the implications.
By contrast, a debt arrangement scheme is a repayment-in-full programme. It requires you to pay back everything that you owe (less interest and charges, which are frozen) over a period that can be anything up to 10 years or so. This is a big commitment, but the upside to all of this is that, unlike other debt options, you retain control of your assets and there are no major implications other than a reduced ability to get credit.
All of the debt solutions offer a way forward to suit very different circumstances. High-quality professional advice is essential in agreeing the way forward and deciding which option is right for you.
It is also important to remember that hesitating or failing to act can lead to huge problems and mean that you are even less in control of your circumstances.
By contrast, taking action now can lead to a much brighter and more secure future for you and those closest to you.
We are happy to discuss any of the debt solutions with you.
We offer a free initial discussion to find out how we can help. One of our advisers can call at a time suitable for you, or if you prefer, we can meet privately at our offices, your home or at a local coffee shop.
To arrange a free confidential consultation, please contact us today here.
About the author
Richard Gardiner
Richard is Head of our Corporate Recovery and Debt Solutions Department.
He is a licensed Insolvency Practitioner with the Institute of Chartered Accountants of Scotland.
He manages a large team of managers and support staff who offer the complete spectrum of personal and business debt solutions available under Scottish legislation.