The Facts 

A 23 year old civil servant with unsecured debts of £35,000 on credit cards, loans and bank overdraft was referred to us by her Welfare unit. Payments to her creditors amounted to £930 each month, this from a take home pay of £1,125 leaving just £195 a month to live on, and pay for rent, utilities and motoring costs. Her debts were spiraling and she was borrowing more on each credit card just to make the payments to other creditors.

The individual was not seen as a risk by her creditors however as all payments were up to date but completion of an income & expenditure form revealed that after accounting for the necessary items of household expenditure, the actual amount of monthly disposable income was only £320. It was obvious therefore that the she could never meet the sums required each month to pay her debts which were actually increasing by £610 each month (£7,320 in a year) not including interest. 

The Advice 

The first thing was to open a new bank account, without credit facilities, with a bank that was not owed any money. This stopped the original bank from closing down the old account on their terms and prevented them from continuing to take their payments for any loans. 

Consideration was then given to using a Debt Management Company (DMC), Bankruptcy or proposing an Individual Voluntary Arrangement (IVA). The DMC option was dismissed as in the majority of cases some creditors would still add interest and late payment charges, making the overall debt increase. Furthermore the debt would need to be paid back in full, perhaps taking up to 15 years depending on the interest charged. Our case did not wish to go bankrupt, even though the payment term to creditors, through the bankruptcy, would be for only 3 years, as she lived in rented accommodation and her only asset was the car worth £6,000. 

The debtor decided to propose an IVA to her creditors as she was clearly insolvent and had no assets other than a two year old car, which was paid for. The proposal would entail monthly payments equivalent to her disposable income of £320, over a period of 5 years, and she proposed to sell the car, current value £6,000 and replace it with one for around £3,000. This freed up £3,000 of additional funding which was to be pledged into the IVA to boost the overall return to creditors. This act was seen by creditors as a positive move by the debtor and demonstrated her desire to pay back what she could. 

Because the creditors were contacted immediately advising them that the individual was seeking professional advice in order to address her financial problems, she was spared the constant pressure from telephone calls and threats of court action to recover the debts. 

The Outcome 

About 11 weeks after our initial consultation a meeting of creditors was held at which the individual's proposal for an IVA was accepted. No interest and late payment charges can be added to the debt after this stage and both the debtor and her unsecured creditors are bound by the terms of the arrangement. Providing the debtor continues to make the agreed monthly payment to the Supervisor of the arrangement who distributes the funds to the creditors, at the end of the arrangement her unsecured liabilities will be deemed to have been legally discharged. 

Should the debtor had chosen bankruptcy creditors were not projected to have received much of a return other than a percentage of the sale proceeds of the car as this would be seen as an asset. With the IVA creditors will receive a return of around 40%, i.e. 40 pence for every pound of their claim, providing the IVA is completed in accordance with the terms. 

The debtor had no further contact with the creditors and, as in so many cases, credit was her downfall and, although her credit rating is impaired, it is probably helpful that she is not able to obtain further borrowing for the time being. With some guidance as to future money management she is now back in control of her finances. 

More details on Debt Management Companies, Individual Voluntary Arrangements, Bankruptcy and our Debt Option Comparison table, 6 Option Guide to Getting Out of Debt and the Budget Planning Forms. 

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