Insolvency At Record Levels – Could A New ‘Debt Wipeout’ Product Be Your Lifeline?

More people have become insolvent in the past year than ever before, with 35,574 personal insolvencies in the last quarter of 2009 alone, according to official figures, and a new product – the Debt Relief Order – is gaining pace on traditional methods of dealing with debt, and could help you.

Debt relief orders – introduced last April – accounted for just 11,831 of the 162,613 total insolvencies for 2009. But the number of people using them from the second quarter of last year to the end of the year grew a massive two and a half times.

Debt relief orders have got lenders in a spin because anyone granted one will have their debt discharged after a year. The creditors are unhappy because they think they are too easy to get.

They are losing money because the debts are wiped out so quickly – bad news for them, but great news for anyone struggling under the burden. The debt relief order costs just £90, and will help you deal with debts of less than £15,000.

To qualify for a debt relief order, you cannot own your home, must have less than £300 in assets and a disposable income of no more than £50 a month. While this will not help everyone, Citizens Advice reckons around 50,000 people – about a third of the clients it advises – will be eligible.

But even if you are not one of these people, there is plenty of debt help available:

Debt Management Plan

The simplest way to deal with your debts is with a debt management plan. You get an expert to help you formulate the plan, and they will also help to liaise with your creditors. As they know what they are doing, they are likely to get a better result for you than if you did this yourself.

Your interest will be frozen, stopping your debts from growing any more, you can reduce the total amount you owe – as many creditors will write off a portion of your debt – and you pay a set amount each month that you can afford, agreed with the debt management advisor.

Failing to keep up with this could result in your creditors taking action against you though, and because this is an ‘agreement’ rather than legally binding, they could change the terms any time.

Individual Voluntary Arrangement (IVA)

An IVA is a legally binding agreement, and you pay a full and final settlement to your creditors, and the debt is cleared within five years. You have to owe more than £15,000 before you can consider this as an option, but once you have 75 per cent of your creditors voting in favour of this option, you know you are on the way to being debt free.

You have to disclose the value of all your assets, and you would pay an agreed amount per month for a set period, usually five years. The IVA is run by an insolvency practitioner, so you must get advice before signing up.

Bankruptcy

This is the most extreme form of debt protection, yet can be started – by you or a creditor – if you owe as little as £750.

You have to petition the County Court or High Court for bankruptcy, and everything you own will be taken into account for the bankruptcy order. The Official Receiver handles your case, and he or she will decide how your assets should be used to pay off your debts.

A bankruptcy order costs £510 to get – so it is not cheap – and the rules are much more stringent. You cannot get credit, and you can only have a minimum amount of disposable income.

Many bankruptcies are now discharged within a year, so it could be seen as a short –term blip. But don’t be fooled, it will have a big impact on your ability to get credit for years to come. It is not an easy way out.