This is a really insightful and helpful guest post from Scott Nelson, creator of MoneyNerd.com. He is all about helping people with debt and personal finance. Definitely make sure you check him out! And if you are in debt, make sure you spend time reading this, and then as Scott says, go and get help ASAP!
What happens when your debt gets out of hand?
When it feels like you need to take immediate action? When you’re faced with the last resort?
Many people believe they can claw their way out of debt. They often try for too long, stubbornly attempting to fix things on their own when asking for help could make things easier.
Maybe you’re desperate to prove to yourself that you can fix your problems? Maybe you’re ashamed of past spending, or of being in any financial situation that made you resort to loans?
Don’t be. There are so many reasons why people get into debt that they’re unable to cope with. IVAs and bankruptcy might be last resorts, but they can be the best solution if you realise that you have no other options.
Before we explain IVAs and bankruptcy, it’s worth reminding you that these debt options aren’t for everyone. If you can use the snowball method to get out of debt, or a less formal agreement like a Debt Management Plan, then those are the best options for most people. But if things have gone too far, and an IVA or bankruptcy if your best option, here’s what to expect next.
What’s an IVA and who is it good for?
An IVA is an Individual Voluntary Agreement. You agree to make regular payments to a middleman (formal title: insolvency practitioner). The middleman then passes your money to your creditors, slowly bringing down your debt.
The insolvency practitioner takes care of everything, splitting money into the right amounts and sending it where it needs to be. You’ll only pay what you can afford.
Usually after five years, all remaining debts are written off. An IVA is a lot like bankruptcy, but with a chance for creditors to claw some money back before you write everything off. An IVA can only start if at least 75% of creditors agree to go ahead with the arrangement.
IVAs involve setup fees, and usually include a handling fee with every payment that’s passed through the insolvency practitioner. You’ll also be subject to annual reviews and your name will appear on the public Insolvency Register.
An IVA could be right for you if you have a lot of debt and it would take a long time to pay it back. A five-year limit can give some hope for the future, with a chance to start making things right.
What’s bankruptcy and who is it good for?
Think of bankruptcy like a fast-track IVA. Instead of spending five years trying to clear some debt, you accept that you can’t make monthly payments for half a decade.
There are considerable up-front fees when filing for bankruptcy (usually more than £500 in one go), but once it’s finalised you can start afresh.
The big problem with bankruptcy is that your assets can be sold to clear some of your debts. Making small and regular IVA payments will protect things like your house and vehicle, but if you choose bankruptcy these can be sold to get money to cover your debts. You could lose absolutely everything you’ve worked for, and of course your name will be on the Insolvency Register.
Bankruptcy’s serious. It can affect your living arrangements, travel options, your ability to get a basic bank account and even what jobs you can apply for. After bankruptcy, it can be very hard to start rebuilding your life.
Bankruptcy isn’t all bad, though. Some people just need that fresh start and another chance. Most bankruptcies are finalised within 12 months, giving you space to move forward and rebuild from the ground up.
What to consider before going down either route
Consider the long-term impact of IVAs and bankruptcy. Your credit score will be destroyed and it can be hard to rebuild. When you can’t even get a phone contract or a standard bank account, how do you start building a more positive relationship with money and future debt?
Your name will appear on the public Insolvency Register, where anyone can find it. It won’t be published in flashing lights on Facebook, but could come up in search results if someone happens to go looking.
As IVAs and bankruptcy are last resorts, always check what other options are available to you. If you can make regular payments with no end date in sight and without your remaining debt written off, you might be more suited to an ongoing Debt Management Plan (DMP) without insolvency.
Who to seek help and advice from
When you’re in debt, you’re vulnerable. Scammers will, sadly, prey on your fear, panic and desperation. If you need debt advice and help, don’t get it by responding to random adverts on Instagram, Facebook or Twitter.
There are trustworthy sources for debt advice. Debt management charities won’t charge you for advice, and will help you to consider all available options whilst you’re finding the most suitable. Stepchange is a great place to start for debt support.
You can also look at the Citizens Advice website, visit a local branch or speak to an advisor online.
Long-term impact of an IVA or bankruptcy
Your credit file will be metaphorically ripped to shreds following insolvency. No creditor will want to touch you with a barge pole, so even things like phone contracts will be out of reach. You might struggle to set up Direct Debit payments and might need to pay up-front for everything.
Insolvency brings a fresh start, but it can be hard to rebuild your life from absolutely nothing. IVAs and bankruptcy aren’t the easy way out.
Insolvency will stay on your credit file for at least six years after you’re discharged. You might also be asked if you’ve ever been bankrupt, even years later, by people like landlords and employers.
After you’ve gone through bankruptcy or an IVA, make all your efforts worthwhile. Use your fresh start to make things right and stay in control of your money. Don’t fall back into old habits.
Never be afraid of seeking debt advice or financial support. Simply asking for help can bring about solutions that could save you from endless sleepless nights.
I think this guest post goes a long way to explain what an IVA and bankruptcy means. It’s definitely not the easy way out as Scott says, but it can be the route you need to take tto make a fresh start.
As well as his blog, moneynerd.com, Scott also has a really helpful YouTube channel packed full of even more helpful information about debt and money.
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