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There are many solutions for tackling debt, but some offer the borrower more security than others. In particular, 'government-approved' debt solutions can give people a lot of peace of mind.
What does 'government-approved' mean?
What most people mean when they talk about 'government-approved' solutions is that they're backed by law: formal, legally binding solutions that protect struggling borrowers against further action from their lenders.
There are several debt solutions like this available in the UK. Here's a rundown of a few.
IVA - England, Wales & Northern Ireland
An IVA (Individual Voluntary Arrangement) is an agreement that enables struggling borrowers to repay as much of their unsecured debts as they can over a set period (normally five years). The remaining debt is then written off at the end of that time - as long as it all goes to plan.
During an IVA, borrowers are expected to pay as much as they can towards their unsecured debts every month, based on what they have left after they've covered their other essential living costs. In return, they are legally protected against enforcement action regarding debts covered by the arrangement.
However, an IVA often requires homeowners to release equity in their home to pay towards their unsecured lenders, and it will have an impact on their credit rating.
Trust Deed - Scotland only
A Trust Deed is generally seen as the Scottish equivalent of an IVA, and it works in a similar way. However, instead of spanning five years, a Trust Deed normally lasts three years before the borrower's remaining unsecured debt is written off. Like an IVA, a Trust Deed protects the borrower against action from lenders involved in the arrangement.
A Trust Deed normally requires homeowners to release equity from their home as part of the agreement. It will also affect the borrower's credit rating.
Debt Relief Order - England and Wales
Debt Relief Orders were brought in in April 2009. A DRO is an insolvency solution that can help people who need to be declared insolvent but can't afford bankruptcy fees. For a £90 administration fee to the Insolvency Service, a Debt Relief Order freezes the borrower's unsecured debts for a year and prevents lenders from taking action regarding debts covered by the arrangement. If their financial circumstances haven't improved significantly by the end of that time, those debts are written off.
However, there are strict eligibility criteria for a DRO, including:
- The borrower must have a monthly disposable income of no more than £50
- They must have assets worth no more than £300 in total (although they can own a car worth no more than £1,000)
- They must have combined debts of no more than £15,000
- They must not have been subject to a DRO in the last six years
- They must not be going through any other formal insolvency procedure.
As with an IVA, a DRO will have an impact on the borrower's credit rating for six years after it starts.