Examples

Set out below are three typical examples of financial problems we regularly come across. These are for illustration purposes and, as each case is different, you should ask us for your own financial review and available solutions based on your exact circumstances.
The amount of the unsecured debt written off will vary from use to use, and your credit record will be affected.

Example 1 : Own home with small amount of equity
In this example it is assumed that you own your own home worth £200,000 with a £180,000 mortgage, and you have loans and credit cards totalling £75,000 costing around £1,500 per month to service. Your household income is £2,500 per month and essential outgoings (excluding credit payments) are £2,000. You therefore have surplus income of £500 per month to service debts costing £1,500 – the problem.

Solutions
Doing nothing will not work as you will be £1,000 short every month, probably resulting in more credit being taken out to service existing debts, then compounding the problem. A remortgage is unlikely to be possible, as the mortgage is already up to 90% of the property’s value. A debt management plan is unlikely to be advisable because the loans and credit cards are of a sizeable nature, and would result in payments being made to creditors of possibly over twelve years.

The shortest solution would be bankruptcy. The trustee would seek to sell the property to realise the equity for the benefit of creditors. As there is surplus income, he would be likely to request income payments of around £350 per month for three years. After allowing for bankruptcy costs, creditors might get around 15p in the £.

An alternative longer solution but which might enable the house to be retained would be an IVA. Creditors would expect most of the surplus income of £500 to be paid into the arrangement over five years. After costs, creditors would receive around 25p in the £, and the remaining 75% of the debt would be written off.

The choice between an IVA and bankruptcy then depends whether you want a quick solution where you would have to forego your house (bankruptcy), or a longer solution where you may be able to retain it (IVA). Either way, both solutions bring your monthly debt repayments down to an affordable level and write off a large proportion of your debts.

Example 2 : No significant assets
In this example it is again assumed that you have a household income of £2,500 and household expenses of £2,000 per month before debt repayments. You again have debts of £75,000 costing £1,500 per month to service, leaving you £1,000 per month short – the problem. This time you live in rented accommodation.

Solutions
As before, doing nothing will not work as you will be £1,000 short every month, probably resulting in more credit being taken out to service existing debts, then compounding the problem. A remortgage is not possible. A debt management plan is again unlikely to be advisable because the loans and credit cards are of a sizeable nature, and would result in payments being made to creditors of possibly over twelve years.

The shortest and cheapest solution would be bankruptcy. As there is surplus income, your trustee would again be likely to request income payments of around £350 per month for three years. After allowing for bankruptcy costs, creditors might get around 5p in the £.

An alternative longer solution would be an IVA. Creditors would again expect most of the surplus income of £500 to be paid into the arrangement over five years. After costs, creditors would receive around 25p in the £, and the remaining 75% of the debt would be written off.

With no house to protect this time, bankruptcy provides a cheaper and shorter option and so, all other things being equal, bankruptcy would appear to be the best way forward. Reasons for possibly wanting to do an IVA might be to avoid the publicity, to protect employment (eg to carry on being a company director) or a desire to give creditors a better deal. Again, either way, both solutions bring your monthly debt repayments down to an affordable level and write off a large proportion of your debts.

Example 3 : Own home with larger amount of equity
In this example it is assumed that you own your own home worth £200,000 with a £150,000 mortgage, and you have loans and credit cards totalling £100,000 costing around £2,000 per month to service. Your household income is £2,750 per month and essential outgoings (excluding credit payments) are £1,750. You therefore have surplus income of £1,000 per month to service debts costing £2,000 – the problem.

Solutions
Doing nothing again will not work as you will be £1,000 short every month, probably resulting in more credit being taken out to service existing debts, then compounding the problem. A remortgage might be possible, but this is unlikely to raise more than £25,000 after costs. Because mortgages are cheaper than loans and credit cards, this might improve the monthly deficit, but there still being a shortfall of over £600 per month will not solve the problem. A debt management plan is unlikely to be advisable because the loans and credit cards are of a sizeable nature, and would result in payments being made to creditors of possibly over eight years.

The shortest solution would be bankruptcy. The trustee would seek to sell the property to realise the equity for the benefit of creditors. As there is surplus income, he would be likely to request income payments of around £700 per month for three years. After allowing for bankruptcy costs, creditors might get around 45p in the £.

An alternative longer solution but which might enable the house to be retained would be an IVA. To raise funds for creditors, this time the property could be remortgaged prior to an IVA being entered into, which might raise cash of £25,000 to pay into the IVA. The additional mortgage cost would reduce surplus income to £875 per month. Creditors would expect most of this to be paid into the arrangement over five years. After costs, creditors would receive over 65p in the £, and the remaining 35% of the debts would be written off.

Again, the choice between an IVA and bankruptcy then depends whether you want a quick solution where you would have to forego your house (bankruptcy), or a longer solution where you may be able to retain it (IVA). Both solutions bring your monthly debt repayments down to an affordable level and write off a significant proportion of your debts.

Don’t forget, by contacting us we will free of charge and without obligation review your financial position and advise you which solutions are appropriate for you and how they will work.