Debt Questions & Answers


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Debt Management Plan (DMP) FAQs

How much can I reduce my payments by?
How much will it cost me to set up a debt management plan?
How are payments made?
How will a debt management plan affect my credit rating?
Will my creditors still contact me if I'm in a debt management plan?
Will I still have to pay interest to my creditors?
Is there a minimum contract?
How long will a debt management plan last?
How much will each creditor get from my monthly payments?
How will I know my creditors are getting paid?
What support and advice will I receive?
Which debt can be included in a debt management plan?
Will I need to change bank account?
Will I need to live on a tight budget?
Can I enter into a debt management plan if I have any CCJ's?

 


IVA FAQs

How is an IVA different from a debt management programme?
How can I set up an IVA?
Will my creditors accept an IVA?
How much does an IVA cost?
What if I can't make payments?
What will happen at the end of an IVA?
I'm a home owner - what will happen to my home?
My creditors are hassling me - will this stop once I've started the IVA?
How long will an IVA last for?
I'm self-employed.  Will an IVA affect my position?

 


Debt Consolidation Loan FAQs

How does debt consolidation work?
Why could debt consolidation be a better option than another debt solution?
How can debt consolidation reduce my payments?
Do I have to be a home owner to consolidate my debts?
Are there any drawbacks to debt consolidation?

 


Bankruptcy FAQs

What are the affects of going bankrupt?
What's the procedure for going bankrupt?
How does a bankruptcy end?
How does bankruptcy affect my credit rating?
Will you help me file for bankruptcy?

 


Other FAQs

Are there any other debt solutions available?
How can I trust you?

Do you charge for advice?
I'm self-employed - am I liable for business debts?
Can my mortgage lender take action if I'm in arrears?

I believe my lender / product provider has treated me unfairly - what are my options?
How can I deal with a CCJ?
What is a Debt Relief Order?

 



Debt Management Plans (DMPs)

How much can I reduce my payments by?

A debt management plan is designed to reduce the payments to creditors of unsecured debts (e.g. credit cards, peronal loans, overdraft and store cards) based on your disposable income.  Your disposable income is the money you have left over each month after paying your priority living costs e.g. mortgage/rent, utility bills, food etc.

For example, if you are currently paying £650 each month on 3 credit cards and a personal loan, but you disposable income is only £300, we will help you arrange a plan to pay £300 per month, which will then be split between each creditor on a pro-rata basis.

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How much will it cost me to set up a debt management plan?

Here at Money Advice, we do not believe in charging our clients any up front advice fees.  We simply charge a 15% management charge for the work we do which includes negotiating with your creditors on your behalf, freezing interest (where possible), giving advice, setting up the plan, managing and reviewing the plan and being available whenever you have any questions or concerns.

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How are payments made?

You can pay monthly either by cheque or direct debit.  This is paid to a fully regulated and authorised company who then pay your creditors.

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How will a debt management plan affect my credit rating?

A DMP will not show on your credit file, however, if you are already in financial difficulty, your credit rating is likely to have been affected already. Whenever the full contractual payment isn't made, whether this is through a DMP or not and even if the payment is just a few pounds short, it can still affect the credit rating as you will not  be complying with the credit agreement.

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Will my creditors still contact me if I'm in a debt management plan?

Creditors are still entitled to contact clients directly so we cannot guarantee that all letters and phone calls will stop immediately, but we will attempt to get them down to a minimum and once the DMP is well established they should stop altogether. All correspondence received from the creditors by the client should be sent to our customer service team for action.

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Will I still have to pay interest to my creditors?

Creditors aren't obliged to freeze interest and charges and this cannot be guaranteed. However, if a realistic income and expenditure statement is provided to creditors through a DMP, then there is an opputunity of achieving this although there are a small number lenders whose policy is not to freeze interest. Creditors can be more cooperative when they see that the debtor is making every effort to clear their outstanding debts.

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Is there a minimum contract?

No.  You can stop the DMP at any time, but we ask that we are notified so we can inform all creditors.  If you are experiencing further financial problems and cannot afford the payments and let’s us know, we may be able to restructure the plan.

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N.B. Once the plan is cancelled, any creditors who have frozen interest may and will resume interest and charges.

How long will a debt management plan last?

The length of the Debt Management Plan depends on each individual situation. It also depends on the level of debt and monthly surplus. If creditors freeze interest and charges, the length of the DMP can be dramatically reduced.

For example: If £9,000 is owed and the client can afford to pay £150 per calendar month the DMP will last for just over 5 years (60 months). This applies only if the payments are maintained each month and the creditors freeze interest for the duration of the plan. However, if the creditors do not agree to freeze interest and the some of the companies will not, then the period of repayment will be longer. The DMP can be completed sooner if the clients circumstances improve and their payments can be increased.

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How much will each creditor get from my monthly payments?

This depends on the surplus income (i.e. money left over every month after paying all
living expenses) and how much is owed to each creditor.

For example:

If there were three Creditors, as below:

Creditor Amount / (% of total debt)

Total: £9600.00
Credit Card: £2304.00 (24%)
Store Card: £1056.00 (11%)
Bank Loan: £6240.00 (65%)

If surplus income = £210 per month, then the pro-rata payments to each creditor will
be:

Creditor Amount / (% of total debt)

Total: £210.00 per month
Credit Card: £50.40 per month (24%)
Store Card: £23.10 per month (11%)
Bank Loan: £136.50 per month (65%)

We will pay the agreed amount each month to each of the creditors, on the client’s
behalf, after deduction of the management fee.

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How will I know my creditors are getting paid?

You will be sent a quarterly statement setting out details of payments received  and payments made to the creditors.  You may occasionally be contacted by the creditors to say that they haven't received a payment, which may be untrue; they may be asking you for more money directly, or there may even be a misunderstanding between departments. If the client suspects the creditors aren't being paid or that a mistake has been made, then they should get in touch with us.

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What support and advice will I receive?

Our commitment is to provide excellent support to our clients. If the your financial situation changes, you can contact our customer service team who will try and arrange a new plan. Our members of staff are always there to give support and answer any questions you may have.

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Which debt can be included in a debt management plan?

A DMP will only help you make reduced payments to unsecured creditors, therefore the debts that can be included are:

  • Personal loans (loans taken to purchase cars are fine but Hire Purchase (HP) agreements cannot be included)
  • Credit cards
  • Store cards
  • Catalogues
  • Overdrafts

Secured debts can't be included in DMPs because any payments on secured debts
that aren't met in full, can lead to goods being repossessed.

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Will I need to change bank account?

If you have a current account with a company who money is owed to, you will be required to open a new bank account. This is not only the case with a DMP but you should change your bank account if you are going to make reduced payments to a company that you also bank with. Banks have the right to offset so any money in a current account could be used to pay another debt with the bank.

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Will I need to live on a tight budget?

To enter into and maintain a successful DMP, you will need to live within a budget, however this is discussed openly with you during our initial conversation or meeting. We are required to submit income and expenditure details to  your creditors. It is in your interest to show creditors that you are prepared to make some sacrifices to help repay the debts.

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Can I enter into a debt management plan if I have any CCJ's?

As a DMP isn't legally binding creditors could still take action (though this is rare). As we have many years experience and have a good relationship with the creditors, this is less likely to happen. However we would continue tosupport you if any of the creditors applied to the court for a CCJ. Even if a creditor applied to the court for a CCJ the payment should remain similar to what has previously been agreed.

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Individual Voluntary Arrangements (IVA)

How is an IVA different from a debt management programme?

A Debt Management Plan is an informal agreement between you and your creditors to reduce the unsecured debt payments you are making based on your disposable income (affordability).  Interest and charges can often be frozen, but this is not guaranteed.

An IVA is a formal (usually 5 year) agreement, backed by government legislation and administered by a licenced Insolvency Practitioner to reduce unsecured debt payments, freeze interest and charges and in most cases, write off any debt that is not paid back after the term of the IVA.

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How can I set up an IVA?

When you contact Money Advice, we'll go over your financial situation with you and recommend the debt solution which is best suited to your individual needs. If that turns out to be an IVA, we'll ask you to supply us with specific details so we can draw up an IVA proposal which we think your creditors will accept, based on how much as you can afford every month once you’ve allowed for your living expenses and secured debts.

Next, we send the proposal to your unsecured creditors, so they can see how much money they would recover through an IVA. At the Creditors' Meeting, they can accept it, reject it or request changes to it.

If it is accepted, the IVA can officially start – your creditors are then legally bound by it, so as long as you uphold your side of the agreement, they cannot change their minds or go back on any part of the agreement.  When the IVA ends (usually in 5 years), you will be debt free.

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Will my creditors accept an IVA?

Once we have discussed your financial situaion and decided that an IVA is the best debt solution for you, we will send a proposal to your cerditors.  The proposal is for the lenders to accept a lower amount than the amount outstanding based on what you can afford over 5 years.

When the creditors' meeting takes place, your IVA proposal must be accepted by voters who collectively 'own' 75% of your debt. If this happens, even the creditors who vote against it or do not vote at all will be bound by it.

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How much does an IVA cost?

Money Advice does not believe in charging for debt infomation and advice, therefore there is no upfront fee payable.  All fees and costs incurred for setting up and managing an IVA will be deducted from the payments you make. Before anyone commits to the IVA, everyone involved (you and all your creditors) will know exactly how much they'll pay or receive during the IVA.

We do not pay or receive any undisclosed fees or commission – we are committed to being totally clear about all fees and charges, and to providing a service which is fair to both you and your creditors.

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What if I can't make payments?

As part of the service we provide, we will review your monthly payments on a regular basis to check that they are still affordable. If you are no longer able to meet your payments, this can threaten the success of your IVA, and can even lead to you being made bankrupt. If you are finding it hard to make your payments, we will try to renegotiate lower payments with your creditors, although they are not obliged to accept this.

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What will happen at the end of an IVA?

If you maintain the agreed payments for the duration of the IVA, these are considered to be in full and final settlement of your debts.

In other words, once your IVA has come to a successful conclusion (usually after 5 years), your unsecured debts will be cleared and all creditors involved in the agreement will have no further claim against you.

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I'm a home owner - what will happen to my home?

Your home may or may not be included in the IVA proposal. This will determined by your circumstances.

If you do not have more than £5,000 of equity in your home (the amount left after your mortgage and other secured creditors have been paid when the house is sold) then it is unlikely the house will be included in your IVA.  However, if you have a large amount of equity, your creditors may ask for part of your share of it to be included. If you own your property jointly, with your wife for example, then your share would be half of any equity.

You would normally arrange to contribute your share by re-mortgaging your property during the course of the IVA, usually near the end. The amount raised will never be more than the remainder of the debt you owe and will never be more than 85% of your share of the equity. If there is no equity, or you can't get a re-mortgage, you may be asked to make up to a year's further contributions - but never more.

A further advantage of an IVA is that you will have a number of years to arrange this whereas in bankruptcy you would be allowed a maximum of 12 months to do so - before being forced to sell your home to make the contribution.

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My creditors are hassling me - will this stop once I've started the IVA?

Once the IVA proposal has been accepted, then your creditors will sop contacting you regarding settling your debts.  An IVA is a formal agreement, which means both you and your creditors are bound by its terms.

Money Advice places great emphasis on speed and efficiency and we aim to have IVAs arranged and accepted within a month.

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How long will an IVA last for?

The majority of IVAs last for 60 months (5 years) though in some circumstances, the term can be longer or shorter.

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I'm self-employed.  Will an IVA affect my position?

IVAs are designed to assist people who are experiencing serious financial problems and even the smaller, self-employed business person can take advantage of an IVA - so long as an IVA is in their best interests.

Creditors will allow a business to continue, so long as the business is still viable, after all, it will be the creditors who also benefit from allowing business to survive, as they realise more of the outstanding debt will be repaid through an IVA than would be repaid if they made the individual bankrupt.

If you are a professional such as a Solicitor or Financial  Adviser, then it would be wise to check with the professional organisation that you are a member of first, to see if this will have an effect on your accreditation.  Likewise in certain jobs, being in an IVA can be contrary to the terms and conditions in your contract of employment. Make sure you check this to see if you would be affected.

N.B. in most employment or job scenarios the employer does not need to know about an IVA. An IVA is a private arrangement between you, your creditors and the IVA Insolvency Practitioner. The only people that will be aware of the IVA are your creditors. Some people don’t even tell their husband or wife about the IVA. The IVA is very different to bankruptcy as it is not advertised or published in 2 local papers and the London Gazette. Please note that your employer will not find out about your IVA unless you tell them.

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Debt Consolidation Loans

How does debt consolidation work?

A debt consolidation loan is a secured or unsecured loan taken out to pay off other smaller debts.  This makes it easier to manage debts as you are only paying one payment each month to one company, instead of several, often to different companies.  It can also reduce monthly payments, especially if the debt is spread over a longer period of time.

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Why could debt consolidation be a better option than another debt solution?

The maion advantage of debt consolidaion is that your cerdit rating rating will not be affected like it would with a Debt Management Plan, IVA or Debt Relief Order for example.  This of course is only true if you have not fallen behind on your current debt payments and continue to make agreed payments on your new debt consolidaion loan.

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How can debt consolidation reduce my payments?

There are two ways a consolidation loan can reduce your monthly payments:

  1. By spreading the debt over a longer period of time.  For example, a secured loan can be paid back over a term of 10 years or even longer
  2. You may get a better interest rate that you are currently paying on your current debts, especially if they are primarily credit card or store cards.  The interest rates on secured loans are almost always less than rates on personal (unsecured) loans

N.B. if a secured loan is taken out to consolidate debts, your home may be at risk if you do not keep up payments on the loan

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Do I have to be a home owner to consolidate my debts?

No. You can take out an unsecured consolidation loan if you don't own any property, or if you don't wish to borrow against it.

As mentioned above, an unsecured consolidation loan will often come with a higher interest rate than a secured loan.

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Are there any drawbacks to debt consolidation?

If you take out a secured loan to consolidate your debts, you may end up paying the debt back over a longer period of time therefore potenially increasing the lifetime of the original debt.  Also, if a secured loan is taken out to consolidate debts, your home may be at risk if you do not keep up payments on the loan

Taking out a debt consolidation loan requires self-discipline because it ‘frees up' credit cards, overdrafts and other credit – if you run up fresh debts, you'll be worse off than you were when you consolidated your debts, as you'll have to pay off your new debts and your consolidation loan.

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Bankruptcy

What are the affects of going bankrupt?

Bankruptcy is the option of last resort for people with debt problems.  The repercussions of going bankrupt include:

  • It can cost up to £600, more if you use a solicitor
  • Whilst you are bankrupt, you can't apply for more credit
  • Any valuable assets, including your home, may be sold so the funds can go towards repaying your creditors
  • Some professions don't let people who have been made bankrupt carry on working e.g. solicitors, financial advisers, a member of a Local Authority etc.
  • If you own a business with assets, it is likely that the Official Receiver will close down the business and sell off the assets
  • Your immigration status can be affected (if applicable)
  • You can't keep your bankruptcy private. Your details will be listed in the Insolvency Register
  • If you did not co-operate with the Official Receiver, or you took on debts knowing that you had no hope of paying them back, you could have a Bankruptcy Restriction Order made against you. They can last for 15 years, and will restrict your financial options
  • Bankruptcy will affect your credit rating for 6 years
  • If you have a pension, part or all of your pension may be claimed by your trustee in bankruptcy, whether you are receiving it now or it is due in the future

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What's the procedure for going bankrupt?

To go bankrupt, you must show that you are unable to pay your debts and then apply to court.  Please visit the bankruptcy page for more information.

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How does a bankruptcy end?

Bankruptcy end with you being discharged.  You will normally be discharged from bankruptcy after one year or in some cases as early as 6 months, however if you have an Income Payments Agreement (IPA) / Income Payments Order (IPO) you will continue to pay for up to 3 years.

If you are subject to a Bankruptcy Restriction Order (BRO) or have agreed to a Bankruptcy Restriction Undertaking (BRU) these will continue to run their course after your discharge, though these are relatively rare.

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How does bankruptcy affect my credit rating?

Your credit rating will be affected for 6 years after your bankruptcy begins.  Your bankruptcy will appear on the Insolvency Register until three months after your bankruptcy order has ended (been discharged). If there is a bankruptcy restrictions order against you, this will appear on the register for the length of the order.

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Will you help me file for bankruptcy?

Though we do not arrange bankruptcies for our clients, we will give advice and provide guidance for those whose only realistic option is to go bankrupt.

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Are there any other debt solutions available?

The most common solutions effective for dealing with debt are Debt Management Plans, IVAs, Debt Consolidation and bankruptcy.

In England and Wales, a Debt Relief Order (DRO) is an order that you may be able to apply for if you can't afford to pay off your debts. It's granted by the Insolvency Service and is a cheaper option than going bankrupt.

It usually lasts for a year and during that time, none of your creditors can take action against you to get their money back. At the end of the year, you are free of all the debts listed in the order.

You qualify for a DRO if you meet the following conditions:

  • You have debts of £15,000 or less
  • You have spare available monthly income of £50 or less after paying your normal household bills
  • The things of value you own (your assets) and your savings are worth £300 or less. This does not include your car as long as it is worth less than £1,000
  • You have not recently been made bankrupt or gone through another sort of insolvency procedure such as an IVA

You can only apply for a DRO through an authorised adviser.

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How can I trust you?

Money Advice only works with fully regulated and qualified partner companies and professionals who have a history of providing high levels of service to new and existing clients.  Our sister company, Money Advice Financial Services Ltd is FSA authorised and hold a full and up-to-date Consumer Credit Licence and Data Protection Licence.  Our independent advisers have over 50 years of combined experience in financial services and you can learn more in the about us section of the website.

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Do you charge for advice?

No.  We do not believe in charging advice fees to people who are already struggling with debts.  All our advice is free and we offer a whole range of debt solutions.

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I'm self-employed - am I liable for business debts?

If you have built up debt in a business then you will be liable for those debts.  If you are struggling with unsecured debts taken out for a business or money owed to the Inland Revenue, the sooner you seek advice, the better.  We can help with these types of debts through a formal debt solution.

If you are a small business and owe money to other creditors e.g. suppliers, then technically, they can petition to make you bankrupt for debts over £750.  We can offer general guidance in this area but this is very much down to the relationship you have with your other creditors and how you communicate with them.

If you have built up personal unsecured debts, you will be allowed to continue running your business as usual if you are in a formal debt solution such as an IVA of DMP.  If you are made personally bankrupt however, this may affect your status if you work in certain professions e.g. law, financial services etc.  It would be wise to check with the professional organisation that you are a member of first, to see if this will have an effect on your accreditation.

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Can my mortgage lender take action if I'm in arrears?

Yes, your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured against it.  It's vital not to ignore mortgage arrears however frustrating and upsetting the situation may appear. To prevent against house repossession, any issues associated with your mortgage need to be addressed as a priority by contacting your mortgage lender.  You may be able to extend the term of your mortgage, take a mortgage holiday or switch to an interest-only mortgage.

A mortgage is a priority debt so it is important to look at your income and expenditure.  If you have any non-priority debts e.g. credit cards or store cards and/or personal loans then you may want to consider a debt solution to reduce your payments to free up money to make towards your mortgage payments.

If you haven't already, now is probably the time to take control of your personal financial affairs and draw up a personal budget which details your household income and expenditure.  This should highlight where you money is going and should help you to identify areas in which you might be able to save money e.g. on utilities or show a need for you to increase your income.

Visit our useful debt tools page for our budget planner and debt calculator.

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I believe my lender / product provider has treated me unfairly - what are my options?

If you feel you have been treated unfairly by a lender or financial product provider, then the first point of action is to speak to them.  If the situation cannot be resolved satisfactorily through an informal method, then the next step is to follow their internal complaints procedure which usually involves writing a letter of complaint.  If the situation still cannot be resolved to your satisfaction, then you should contact the Financial Ombudsman Service if the company is regulated by the Financial Services Authority.

Other options could include:

  • Contact our Financial Claims department.  We offer independent advice regarding making claims on the mis-selling of fianncial products and on unfair relationships between consumers and lenders and/or financial services product providers
  • Contacting the Office of Fair Trading or Trading Standards, certainly for companies that are not FSA authorised and covered by the Financial Services Compensation Scheme
  • Contact the Ministry of Justice if your complaint relates to a Claims Management Company

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How can I deal with a CCJ?

If you have received a County Court Judgement (CCJ) in the post, it will need prompt and urgent attention. A County Court Summons is sent from the Court to a debtor when a creditor (Claimant) has begun legal proceedings.

Your pack will normally contain a number of forms with details of the creditors claim, an admission form, a defence and counterclaim form and guidanance.  To avoid further action from the court, you will need to complete and return the forms within 14 days.

If you need any guidance in dealing with a CCJ or any other debts, please contact us here.

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What is a Debt Relief Order?

A Debt Relief Order is an order you can apply for if you can't afford to pay off your debts.  It's granted by the Insolvency Service and is a cheaper option than going bankrupt.

You must have debts of less than £15,000 and a low income.

A debt relief order usually lasts for a year and during that time, none of the people you owe money to (your creditors) will be able to take action aginst you to get their money back. At the end of the year, you'll be free of all the debts listed in the order.

You can't apply for a debt relief order if:

  • You own things of value or have savings of over £300
  • You own a vehicle worth more than £1,000
  • You have a private pension fund worth over £300.

You may have other options for dealing with your debts besides applying for a debt relief order. For more information, visit the Debt section of the website.

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Useful Links

>>> Debt Management Plans
>>> IVAs
>>> Debt Consolidation
>>> Bankruptcy
>>> Pay Day Loans
>>> Free Tools (including debt calculator)

 

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