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People can get into debt for any number of reasons. It is often the result of a significant change of circumstances including loss of income through job changes, divorce or separation, long term illness or other unplanned events. Despite trying to keep on top of the debt for a period of time, there comes a point where the pressures of trying to make ends meet and answering the seemingly endless phone calls and letters leads to a point where only more drastic action will help. No matter how bad you think your debt problem is there are a number of possible routes to explore each with different consequences and implications.
Firstly, a Debt Management Programme will help to put you back into control without borrowing more money. A Debt Management Programme is an informal arrangement between debtors (people who owe money) and creditors (those who are owed money) to pay debts over an extended period of time. Debtors can arrange a programme directly with their creditors or with the help of a money adviser. Since this is a voluntary arrangement, creditors do not have to agree to freeze either interest or charges and can decide at any time that they no longer wish to accept payments and can pursue the debt using other methods.
In Scotland, (unfortunately not available in England and Wales) the formal debt management plan is The Debt Arrangement Scheme. This is a statutory scheme to help debtors by giving them more time to pay debts without the hassle or threat of court action by creditors. With this arrangement, interest is frozen and all fees and charges attributed to their debts is approved from the date the programme. Debts will be written off once the programme is completed.
Approved money advisors will deliver the scheme at either local authority money advice units or via Citizens Advice Scotland. Provided mortgage payments are made on time, the scheme protects all debtors' assets, including their home.
The most formal arrangement in Scotland is a Trust Deed. This is a formal and binding fixed period arrangement to repay debt on approved terms. The alternative in England, Northern Ireland and Wales is called an Individual Voluntary Arrangement (IVA).
With both the Trust Deed and IVA, an intermediary arranges with the debtor and creditor what assets and income are available and how these will be used to pay debts over an agreed period (between 3 and 5 years). At the end of the term, outstanding debt is written off. Under both arrangements, both creditors and debtors cannot change the terms -but if the financial circumstances of the debtor change then the repayment can be altered.
The debt management plan is flexible but can be changed at any time by the creditor or the debtor. It lacks certainty but provided the debtor keeps up with the terms agreed at the outset then it has a high chance of clearing the borrowings. The Trust Deed is a more formal arrangement and should not be entered into without taking advice from a qualified Insolvency Practitioner.
