Glossary of Debt Terms

IVA (Individual Voluntary Arrangement)

An IVA (individual voluntary arrangement) is an agreement between an individual and their creditors. It allows borrowers to pay reduced repayments against their overall debts if they can prove they are struggling to repay them.

IVAs:

Must be set up by an insolvency practitioner and are a legally binding declaration
Are worked out in relation to the amount of debt the customer has, and how much disposable income is available to them
Mean that payment demands from creditors become a thing of the past once the agreement takes effect

A suitable timeframe for the IVA is chosen and a manageable monthly payment is agreed upon. The debt is usually frozen for the fixed period – five years is fairly standard – so that interest and other charges are put on hold during this time. (A court Interim Order will have to be obtained, which relies on the compliance of the creditors to some degree, but this process rarely involves the debtor.)

Advantages of getting an IVA include:

Having up to 65 per cent of the total debt entirely written off (although this depends on each individual's financial circumstances)
The debt being completely cleared at the end of the fixed period, even if it has not been paid in full (providing the customer sticks to the arrangement)
The customer's financial situation being regularly reviewed by the insolvency practitioner so that any changes to their circumstances are reflected in the IVA

The debtor must normally have unsecured debts totalling £12,000 or more and be able to make a monthly payment of at least £180. No additional borrowing can be undertaken while the IVA is in place and the conditions of the agreement must be adhered to or it is likely to fail.

Many people believe IVAs will result in them being credit blacklisted for life, but this is not the case. Once the agreed period comes to an end, the borrower's credit rating will start to improve and it will be possible to start borrowing again if necessary.

There are also some significant disadvantages to IVAs, however:

Customers with endowments may be forced to sell these and surrender the proceeds before the agreement is sealed
Those with a substantial amount of equity in their home may also need to release some of the property value

It is also worth noting that, while bankruptcy lasts for three years, IVAs normally last for five. And borrowers will usually have to pay back a significant portion of their debt with an IVA, whereas bankruptcy can sometimes clear the debt altogether.

Bankruptcy

Bankruptcy is an option for those that cannot feasibly repay their debts, taking into account their current earnings and expenditures. There are several advantages to bankruptcy, for example:

Less pressure from pursuing creditors
Certain items, such as household goods and a reasonable living allowance, can be withheld
Bankruptcy orders can be completed in as little as a year, at which point the debt is often cancelled in full
When the bankruptcy ends, the customer can make a new start

However, there are also some significant disadvantages associated with bankruptcy, such as:

Customers are not totally protected from all types of creditor court action
There are circumstances where bailiffs can still attempt to remove belongings
It can cost up to £485 to effect a bankruptcy order
Homeowners are likely to have to sell their home before declaring themselves bankrupt
Other items such as a car and other luxury goods usually have to be sold
Business owners may lose their business
A list of people with bankruptcy orders can be published on the internet and in the local newspaper

Even when the bankruptcy period is over, a bankruptcy restrictions order can be imposed (for example if the debts incurred could never logically have been repaid) and this can last up to 15 years

Administration Order

An administration order takes into account all the customer's debts and imposes a single count court order. The borrower makes a monthly payment to the court and this is distributed between the various credit companies on a pro-rata basis. Customers can apply if they have at least two debts, totalling no more than £5,000 and if they already have at least one county court or High Court judgement against them.

The advantages of an administration order include:

It Prevents credit providers taking further legal action against the borrower without court permission
It allows the court to deal with debt rather than the customer being responsible for it
Interest and other charges are frozen
There is no up-front fee
The fixed payment period can be limited if the debtor also takes out a composition order – usually three years
If you receive benefits or are on a low income, payments can be as little as £5 a month if this is all you can afford to pay
A court hearing is not always necessary, but an administration order should not be turned down without one
Failed applications can be appealed or repeated
The terms of the order can be reviewed should the borrower's circumstances change

There are also a number of disadvantages associated with administration orders, for example:

The court imposes a handling fee totalling 10 per cent of the total debt
Debts must be paid off in full unless the judge makes a composition order
The debtor may have to appear in court if creditors object to the terms of the composition order
Creditors can ask for the administration order to be reviewed even after it has been enforced
Details of the order will be kept on credit files for six years
Different county courts have different rules and procedures when it comes to administration orders
If debts are in joint names, each person is liable for the full amount and this could push the limit over £5,000
The court can revoke the administration order if payments are not kept up, which means creditors can continue to pursue the borrower

CCJs (County Court Judgements)

A creditor can make a county court claim against a borrower if they believe the borrower owes them money. Paying the debt will be the end of the matter, but if this is impossible, a private court hearing will decide whether there is in fact a debt to pay, and how it should be repaid.

If the court finds the customer liable for the debt, they will receive a CCJ (county court judgement), an order specifying how much is to be paid. If the borrower has other judgements in effect, the court can combine the debts in an administration order (see above), allowing the customer to make one monthly payment to be shared out among the credit providers.

With a CCJ, the payment is made directly to the creditor, or to a representative of the company. There are several disadvantages to having CCJs, for example:

If you cannot pay the amount owed within a month, the CCJ will be recorded on the CCJ register for six years
If payments are not kept up the creditor is likely to approach the court and the borrower may then have to pay additional costs
Fines and even a custodial sentence can be imposed if the borrower contests the CCJ without good reason

Some important facts to remember, however, are:

The court can change the repayment amount or suspend the order if the borrower is genuinely unable to pay
The customer can ask the court to set aside the CCJ if they see a reason to dispute it, although this can incur a fee
Once the CCJ is paid off, the debt can be marked as 'satisfied' on the register

Debt Management Companies

A debt management company can offer help to people with debt-related problems. These include private financial groups, government providers, and charitable organisations. Debt management companies can help borrowers to:

Work out exactly how much they owe
Prioritise debts so that the most pressing and those with the highest interest are paid off first
Create a budget based on the individual's earnings and outgoings
Cut down on overspending
Pay off debts in manageable chunks

Some debt management companies charge for their services, so it is worth finding out what service they offer and how much it will cost before enlisting their services.

For FREE and impartial debt advice, fill in the debt advice enquiry form and a qualified advisor will assess your individual sitaution and call you back to help you work out the best course of action.

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