Dealing with your creditors after a failed IVA can definitely be difficult. Depending on your creditor, you may just be threatened with legal action or you may even get a notice that your creditor is indeed pursuing legal action against you.
This is why communication with your creditor is extremely important. It’s important for you to assure them that you have a plan moving forward.
We’ve listed some of the options that you can explore below:
Debt Management Plan
You can enter into an informal agreement with your creditors in order to pay back your debt to them. This would involve you personally talking to each of your creditors and ensuring them that you intend to pay back your debts to them in full.
This approach is fast and simple since there’s no paperwork involved and there are no other parties involved either. However, since it’s not a legally binding agreement, there’s a high chance that one of your creditors might grow restless and might not be accommodating of your financial situation. This means you’d still be vulnerable to legal action by your creditors.
For example, suppose you have a bad month and you’re unable to pay your monthly agreed-upon payment to your creditor. If you were in an IVA, your IP would negotiate with your creditors and some sort of compromise would definitely be reached. In the case of a debt management plan, you’re on your own. If your creditors are particularly impatient, you might find yourself in a worse situation than from where you started.
Debt consolidation refers to the act of combining several loans you have into one loan. You do this by taking out a loan to pay off all of your initial loans and then you pay off your debt consolidation loan through monthly payments.
This may seem impractical but it can actually be a very effective way to get rid of creditors that may be trying to strong-arm you or threatening you with legal action. If you’re in such danger then a debt consolidation loan is definitely an option worth exploring.
Debt consolidation can have an overall lowering effect of the amount you pay back each month. However, it can definitely hurt your credit score initially.
That being said, if you leave the bad financial habits that landed you in debt in the first place and pay your dues on time each month, your credit score will slowly start to improve. In the end, the net effect on your credit score will be positive.
Bankruptcy is a type of legal status which states that you are unable to pay your loans when they are due. A state of bankruptcy allows you to obtain a clean slate and start fresh. In return for this, all of your assets are seized from you and divided equally amongst your creditors.
Bankruptcy can be voluntary or involuntary. For voluntary bankruptcy, you would petition for your own bankruptcy. The cost for bankruptcy is £500. For involuntary bankruptcy, one (or more) of your creditors can petition for your bankruptcy. For the petition of such creditors to be valid, you must owe a minimum of £750 to them.
Your bankruptcy goes public when it happens. It is published in the London Gazette as well as in local or national newspapers (or both).
Debt Relief Order (DRO)
A Debt Relief Order or DRO is a formal solution that is designed for people who are unable to pay off their debts given their financial situation. It is sometimes known as a mini form of bankruptcy. It was mainly conceived to give room to people that truly have no way of paying back their debts.
To be eligible for a DRO, you must owe no more than £20,000 to your creditors, you must have very little or no assets and your monthly income should be no more than £50 per month.
If you feel you’re eligible for a DRO, you will be referred to an intermediary who will discuss your financial situation with you. If they agree that you are deserving of a DRO, they will help you complete the online form which will then be submitted to a government official known as the official receiver. The official receiver will then judge your situation and pass the Debt Relief Order if they think it’s appropriate.
A Debt Relief Order is definitely a straight-forward way of removing your debts but very few people who are truly in need qualify for it. Not to mention, there are certain loans that a DRO does not cover, e.g., student loans.
Note: It’s a good idea to seek advice from an independent debt charity if your IVA gets rejected. They can help you choose another option which would have more chances of success considering your situation. An example of a debt charity currently operating in the UK is StepChange.