Is it Really Possible to Write Off your Debts?

24-Feb-2010

You may have come across debt management companies offering to help you write off a percentage of your debt. But is this offer too good to be true? 

On the contrary, it is possible to write off over half of your debt by signing up to a formal debt management programme called an Individual Voluntary Arrangement (IVA).  This is known as a 'Trust Deed' in Scotland.  An IVA is not a quick process and it does involve a substantial amount of commitment from you, but it can help you to get your finances back on track relatively quickly, usually within 5 years.  Below, we explain how an IVA works, and how you can find out if you qualify.

What is an IVA?

An IVA is a repayment agreement that you make with the people you owe money to, and it must be set up by a licensed professional known as an Insolvency Practitioner or IP.  The difference between an IVA and other debt management plans is that an IVA is actually legally binding, whereas a debt management plan is facilitated by a professional but relies on cooperation from both you and your creditors to make it work. 

How does it work?

You need to be approved for an IVA first of all.  The Insolvency Practitioner will sit down with you and work out how much you owe in total and how much you can afford to pay back each month (without making a large dent in your living expenses).  They will also ask you a number of questions about your financial situation.  If an IVA seems like an appropriate solution for your circumstances, the IP will then draw up a repayment agreement with you and ask for your approval.

Once you are satisfied with the repayment agreement and have signed it, the IP will then apply for an 'Interim Order' through the county court, which prevents any of your creditors (the companies to whom you owe money) from taking legal action against you to recover these debts.  The next step is for your creditors to all vote on whether they are happy with the arrangement, which they will do at a 'creditor's meeting' organised by the IP, or by fax or post.  As long as creditors representing at least 75% of your total debt are happy with the arrangement it will proceed.

Do I qualify for an IVA?

You are usually eligible for an IVA if you meet certain conditions.  You must owe a minimum of 15,000GBP (or usually 10,000GBP in Scotland) and owe money to at least 3 separate creditors.  You must also have a disposable income of at least 120GBP per month, and be able to satisfy the IP that you will be able to keep to the terms of the arrangement for the whole 60-month period. 

Click here to request a free callback from an IVA specialist and see if you qualify.

How much will I pay back?

An IVA will usually involve you making one repayment per month (which the IP will then divide up between your creditors), typically over a period of 60 months.  The repayment amount will be based on your disposable income - your income minus your living expenses.  This means that the amount you pay back will be affordable, and should not result in you getting into any further debt.  At the end of the 60-month period, you will be free from the arrangement and will no longer owe money to those creditors, regardless of how much you still owe.

A win-win situation?

Creditors are usually happy to accept an IVA, because it shows that you are taking responsibility for the debt.  Usually they will get more of their money back in this way than they would if you were to file for bankruptcy, so they are prepared to receive only a percentage of their money back again. 

From your point of view, you are protected from legal threats and will no longer be hounded for money by creditors (and the rather more aggressive debt collection agencies who they sometimes sell your debt on to).  You also can make one payment each month, rather than having to juggle repayments to multiple creditors. 

It is important to note that an IVA stays on your credit record for six years from the start of the arrangement, and that you are not allowed any unsecured borrowing (such as credit cards or unsecured personal loans) while the arrangement is in place.  You can however take out a mortgage or change an existing mortgage whilst under the arrangement.

Click here to request a free callback from an IVA specialist and see if you qualify.