Life is unpredictable. One day you may need money immediately to solve urgent issues; another, you google “how often do credit card companies sue for non payment?”. Loans have become commonplace for millions of Americans. Credits have many advantages, but they also pose a great danger to those who cannot always realistically assess their financial capabilities.
Banks and other lenders are always happy to offer their services. However, do not forget that behind credit advertising lies not the desire to distribute money for free, but to make a good profit.
Of course, loans can bring many troubles to people. Unfortunately, some borrowers apply for credit and don’t understand what they will do in case they can’t afford its repayment.
Debt solutions explained
By the term debt solutions we mean the ways to deal with insolvency for people who don’t have enough money for it. You should know that there are no insoluble situations. Even if you face a financial disaster, you still have several solutions to choose from.
The beginning of the loan covering process is accompanied by a thorough collection of information about the borrower. It includes such factors as the financial condition of the person, credit score and history, reasons for insolvency, business prospects, and the ability to earn more money, etc. Due to this data further financial strategy is chosen.
Luckily, nowadays customers can choose the best option exactly for them from various debt solutions. If this topic is Greek to you, you should better look closer into it. The truth is that the more we know, the better we are prepared for possible life challenges. In this article, you will find information about such debt solutions as:
- Individual Voluntary Arrangement;
- Debt relief orders;
- Administration orders;
- Debt Management Program;
- Debt Consolidation.
If you want to know how all of them work, what pros and cons these debt solutions present, and which one is better to choose, keep reading this article till the end. We have considered all the necessary details to make your life easier.
Read More: Best Debt Consolidation Loans
Let’s start with the most popular insolvency solution. I think that everyone has heard the word “bankruptcy” but just a few know what it means. To solve this problem let’s get a closer look into it.
Bankruptcy is the recognition of a person as insolvent and, accordingly, the cancellation of the borrowed sum that a person cannot pay. This procedure can happen with both individuals and organizations. If it is faced by an enterprise, bankruptcy may result in property selling to pay off the credit and, as a rule, further liquidation of the owed sum.
There are two types of borrower insolvency: bankruptcy under Chapter 7 and Chapter 13. The second one includes a payment plan for 3-5 years. Bankruptcy under Chapter 13 allows people to save their homes from foreclosure.
On the other hand, Chapter 7 doesn’t include any repayment plan. It presupposes selling the borrower’s nonexempt assets for closing the loan.
When to go bankrupt
When should a person choose exactly this loan solution? A borrower is forced to go bankrupt when he or she can’t repay the owed sum of money. It happens when the things a person owns value less than a loan itself.
Sometimes this step can help people save their homes and reduce the amount of their insolvency. However, bankruptcy always makes serious harm to a credit score. This negative record will be in your payment record for 7-10 years (depending on its chapter). Even going bankrupt requires money. If you want to apply for bankruptcy, be ready to pay.
Remember that each financial situation is different and unique. Before filing for bankruptcy make sure you have considered all other options. Bankruptcy is usually taken as a last resort. However, if you understand that you can’t cope with the credit alone and have no other solutions, then bankruptcy can even bring some benefits to you.
On the one hand, it will help you get rid of numerous calls from collectors and obsessive thoughts. On the other hand, after filing for bankruptcy a person can face long-term consequences.
How to go bankrupt
Each credit solution requires a deep understanding of the option a person chooses. If you want to file for bankruptcy, you should follow these steps:
1. Think twice: the main rule for everyone is to make your best to avoid going bankrupt. If a person takes this step, his or her life will change radically. A borrower will be literally forced to start life from a new page.
2. Fill in the form: now you have to apply for bankruptcy by filling in the form and paying a set fee. It can be done online or at the nearest bank office.
3. Take care of yourself: all your banking accounts can be immediately frozen after you apply for this insolvency solution. That is why it is a good idea to withdraw some money for your basic living needs: food, utility services, medicines, etc.
4. Confirm personal information in your bankruptcy application and wait for the decision: the adjudicator will let you know within 28 days whether your form was accepted. If they need additional information about you, it may take additional two weeks.
5. You are bankrupt: your application is approved and all your accounts are frozen.
What to do after becoming bankrupt
If you think that after you receive the approval of your bankruptcy the process is done, we have bad news for you. There are still steps you have to go through to start building a new life. What are these stages?
- Get in touch with the official receiver: after you go bankrupt an official receiver gets control over your property. This person will conduct an interview with you within two weeks after you acquire a new status. An official receiver will administrate your insolvency.
- Apply for a new bank account: it will be essential for you to open a new account so that you can satisfy your basic needs. It may be difficult to find a bank eager to issue credit cards for you but it is still possible. In some cases a credit counselor allows clients to use their old accounts.
- Bankruptcy discharge: if you work with an official receiver you may get rid of a bankrupt status after 12 months.
Pros & Cons of bankruptcy as a debt solution
As you know, each cloud has a silver lining. The same can be said about the debt solutions methods. You may think that there are only disadvantages in going bankrupt. In fact, there are some benefits that a borrower can get:
- The sum you owe won’t increase: no interest rate, fees, and penalties will be added to your existing credit;
- Lenders and collectors do not bother you anymore: direct interaction with you is prohibited by law;
- Bailiffs end up the enforcement proceedings and, as a result, lift travel bans (if they were);
- If the procedure of selling the borrower’s property was successful, a person won‘t have to repay a loan anymore.
Unfortunately, bankruptcy has disadvantages as well. Among them:
- Some deals on the alienation of property made within the last 3 years can be challenged;
- These things can be sold at a special auction: mortgage apartment (house), car, stocks and shares, self-propelled equipment, flotation means, air assets, and other valuable property;
- During the procedure, you won’t be able to make use of banking services. What’s more, it will cost you a great deal of time to repair your credit score.
Read More: How to Rebuild Credit After Bankruptcy
Individual Voluntary Arrangement or simply IVA is one of the most popular solutions. Well, it is not as widely known as the previous option but it offers great opportunities and freedom to the customers.
To make use of IVA a person can apply to insolvency settlement companies or find insolvency practitioners (it is cheaper). The main objective of both these solutions is to help a customer with a loan settlement.
But what does IVA mean itself? If you don’t know the answer, we are glad to help you!
What is IVA?
An individual voluntary agreement is a type of formal but legally binding deal between a borrower and a creditor. According to it, a person must repay the owed sum within a particular period of time. This agreement is approved by the court which means:
- A creditor stops charging interest rates and penalties on your credit and chasing you for non-payment;
- A borrower is obliged to make regular monthly money deposits as was agreed;
- You also have to inform your IVA provider about your financial matters including the amount and sources of income.
IVA doesn’t set minimum and maximum credit amounts. However, this type of credit settlement requires money. Before you opt for it, make sure it is beneficial for you. If you can’t afford regular payments for IVA, you should look for other loan solutions.
How does IVA work? Together with the insolvency practitioner you will work out a plan for repaying your loan. It will be based on your income and financial capabilities. You and your credit counselor will agree on the monthly amounts and terms. In most cases, the IVA plan lasts for 5-6 years.
An IVA practitioner will take control over your financial matters, bear responsibility before your creditors, and review your situation each year.
Are you eligible for IVA?
Don’t think that everyone can make use of IVA. To qualify for it a creditor that owes more than 75% of your loan must approve your credit. What’s more, not all loan types can be settled with the help of IVA.
For example, it won’t work with student loans, child support, or fines. Among other things, if you have joint loans, IVA is not the best option. It can help only one person while the second one will be responsible for the whole sum.
All in all, before choosing IVA to make sure you have spare money for the services of insolvency practitioners or loan settlement companies. You can take up to 60 days of breathing space to make a decision on what will you do with your credit. Try to make maximum use of all available benefits.
How to make an application for IVA
If you have considered all pros and cons of this option and decided to apply for IVA, you need to go through the following steps:
1. Choose your insolvency practitioner
Since it is impossible to deal with IVA by yourself you need to find a specialist you can trust with your money and reputation. Make sure the person is comfortable for you to communicate with and has enough experience to deal with your issue.
2. Ask about price:
Don’t forget that practitioner’s services cost money. That is why it is a good idea to look for several candidates and compare the costs. Try to find the cheapest option for you because IVA is a lengthy process. You can also find a specialist who doesn’t ask for payment for an introductory meeting.
3. Insolvency management companies
Some creditors may tell you that you can’t cover your credit without applying to such companies. Don’t believe them! The main aim of insolvency management organizations is to make a profit. Consequently, they can charge money just for finding a practitioner for you (which you can do yourself for free). All in all, think carefully before choosing this option and analyze all services the company offers and the costs it requires for them.
4. Meeting with a practitioner
Before this step, you should analyze your situation including income, loan, and financial prospects. Together with a specialist you will work out a monthly plan and will start the formal process of setting up the IVA. The court takes the decision about your IVA application approval. If it is positive, your IVA will be published on the Insolvency Register website. You will start to make payments directly to your insolvency practitioner as was agreed.
Pros & Cons of IVA as a debt solution
Among the advantages of IVA are the following aspects:
- You pay back as much as you can afford;
- IVA protects your property;
- You get rid of creditors’ harassment for payment;
- No more interest rates and charges;
- Fixed monthly payments.
As to the disadvantages, don’t forget that:
- IVA will lower your credit rating considerably;
- You will have to follow a strict budget;
- IVA requires additional regular payment for the services of an insolvency practitioner;
- You may be forced to release equity from your home;
- It can affect your employment.
As you see, IVA is a better option than bankruptcy but it still has some cons to consider. If you have doubts, ask for a professional consultation. The decisions as to the credit settlement shouldn’t be done in a hurry.
Read More: 5 Unique Tools To Eliminate Debt
Debt relief orders
If you understand that you won’t be able to pay off your credit, DRO can be a beneficial option for you. When compared with bankruptcy, DRO doesn’t harm your reputation and credit so badly.
Thanks to it, a person can reduce the amount of money owed or even write the whole sum off. DRO allows borrowers to feel financial relief and get back to normal life faster. At the same time, lenders have an opportunity to get at least some money from a borrower. DROs are applied for unsecured loans. Keep reading to get to know more about it.
What are debt relief orders?
A debt relief order or DRO allows borrowers to write off some of their loans if they are relatively low. This term refers to any tools and services that can help people settle their insolvency. A borrower can manage it alone or apply for professional help.
Among the examples of DRO are insolvency management apps, programs, credit counseling agencies, etc. To deal with the credit they often offer reduced interest rates and monthly payments. In some situations, a part of a loan can be written off.
Remember that DRO won’t work with all credit types. You won’t qualify for it if you have a student, social fund, child maintenance loans, fines for criminal offenses, etc. What’s more, these insolvency solutions won’t protect you from other insolvencies that occur after you apply for DRO.
When you should seek debt relief
You should know that a person can apply for DRO only once per 6 years. What’s more, information about this step will be recorded in your credit history for the same period of time. Consequently, a person should think about such variants only as a last resort. So, when DRO is worth considering?
The idea to apply for this kind of loan settlement usually comes to mind when a person gets fed up with calls from collection agencies. If you cannot make your ends meet and suffer from a lack of basic necessities, DRO can make your life easier. You should also consider this option if there is a risk of home foreclosure or car repossession. However, you should remember that DRO is possible only if you owe small amounts of money.
Be careful: debt relief scammers
Remember that the financial sphere is full of scammers. They try to still money from desperate borrowers who are ready to pay for settling their issues. The main thing that you should know is that no one can close your credit within a week or reduce your monthly payments. In most cases, insolvency relief scammers promise to make you forget about any financial problems.
There are two types of scammers. The first one will take the money and run away immediately, the second one will demand from you regular payments saying that you just need to wait to make things change.
Due to this, you should take into account numerous factors while looking for credit relief companies. It is a good idea to opt for a reputable organization with a high ranking and positive feedback from customers.
There are also some red flags that you should know about:
- A company asks for full payment before delivering any services;
- They promise to eliminate your credit within a set period of time;
- You get a recommendation to stop any communication with your creditors;
- A company doesn’t want to provide information about its activity.
Do debt relief companies hurt your credit?
Unfortunately, insolvency settlement always decreases a score of a borrower. After all, your rating is a div that shows whether a debt relief company can trust you with their money. The higher your score, the greater your chances of getting a loan.
DRO means that you weren’t able to fulfill your financial obligations. Consequently, credit rating drops. In some situations, it can fall by more than 100 points. To improve this situation a borrower has to take a set of steps. The information about DRO will remain on your credit report for 7 years. But the faster you take this difficult decision, the earlier you can start your credit repair.
Pros & Cons of debt relief orders
If you think about DROs, you must take into account all advantages and disadvantages this option has. In most cases a situation when you have to acknowledge that you cannot pay off your loan seems like the end of life. In fact, even in this situation, you can find something positive for yourself.
Pros of DROs
- DRO is a beneficial alternative to bankruptcy;
- Interest rate and other fees won’t be added to the sum you owe;
- You don’t have to pay anything for 12 months and after this period your loans will be written off;
- Creditors and collectors won’t pursue you;
- You don’t have to go to court.
Apart from benefits, there are also cons you shouldn’t forget about:
- DRO can be applied only if you owe a small amount of money;
- It is not available for all loan types;
- If you are a homeowner, you won’t qualify;
- Your credit report will be affected negatively;
- You will be required to pay the Insolvency Service a one-off;
- Information about DRO will be recorded for 7 years.
Read More: Best Debt Relief Programs & How to Qualify
Among other possible ways to close a loan if you cannot repay it is to make use of administrative orders. It is a legally binding deal between a borrower and a creditor. Under this agreement, a person is obliged to fulfill financial obligations within a prescribed period of time. This deal has to be approved by the court. If needed a judge can ask you to attend a court hearing.
An administration order is more beneficial than bankruptcy and should be considered by anyone as a good option. However, like other insolvency management solutions, this one won’t suit all borrowers. That is why it is important to understand the peculiarities of administration orders.
What are administration orders?
As we have mentioned, an administration order is a kind of compromise between a borrower and a creditor. It is regulated and approved by the court which may make some borrowers avoid these solutions.
Consequently, it is a court that analyzes your financial matters and defines the sum of money a person has to pay each month. How does it work? You pay to a court and it distributes your money among the creditors.
The administration order procedure usually takes 3 years. If you fail to repay a loan within this period, you can ask for a composition order (when a part of your credit or the total debt is written off).
You should know that it is rather difficult to get such an application approved. In most cases court accepts a composition order if a person has serious reasons for being insolvent. Among such people are the elderly, sick, single parent, disabled, etc.
Should I get an administration order (AO)?
Before you apply for an administration order you need to consider all the negative aspects it has. If you owe a big sum of money, you won’t qualify for this type of loan management. What’s more, to apply for an administration order you must have more than one creditor and regular income to pay for services. (10% of the amount you owe).
Sometimes administration orders can result in unemployment. For example, a school governor will be disqualified from the position for it. It means that before choosing an administration order you have to understand whether there are such restrictions at your work.
In some cases, courts don’t allow AO for homeowners or people who have a mortgage. On the other hand, if you have a car or other valuable property you may be asked to sell it.
How to set up an administration order
The process of getting an administrative order is not a difficult one. However, you should know what steps to take.
1. Court decision
After you fill in your application the court will analyze your financial situation, income, owed amount of money, the number of creditors, etc. Due to this information, you will be offered a sum you need to pay each month and set a time within which you will be required to repay your credit (it is usually 3 years).
2. Settlement of details
Your creditor and you will receive a notice from a court where the conditions of your administration order will be written down. If there is something you don’t agree with, you can object to it. Your creditors can do the same. If it happens you will be required to attend a court meeting devoted to your case.
3. The final step
If you and your creditor agree with the proposed conditions, both of you will receive a copy of the administration order. It will be recorded in the Register of Judgments, Orders and Fines. After it your administration order agreement will acquire a legally binding power. This process takes between 4 and 6 weeks.
Pros & Cons of administration orders
Administration orders have both advantages and disadvantages. If you opt for it you automatically agree with all problems and challenges that may arise. So, why should you make use of administration orders?
- You can have a part of your loan written off;
- All your credits are calculated and dealt with together;
- In most cases it lasts for 3 years;
- You pay a particular sum of money;
- Your creditors can’t chase you without permission from the court.
Apart from these positive facts, it is essential to remember the risks you may bear. Among the greatest advantages of administration orders are the following:
- You can be disqualified from your position;
- AO usually takes 3 years. Within this period you won’t be able to make use of other financial services;
- Your credit rating will decrease;
- You will be required to pay 10% of your repayments for the supervision of the procedure;
- The information about taking an administrative order will be kept for 6-7 years.
Read More: 7 Best Types of Loans
DMP stands for a debt management plan. It is a kind of financial schedule that is carefully worked by nonprofit credit counseling agencies. The main objective of DMP is to help a borrower close a credit.
It becomes possible thanks to reduces interest and adequate monthly payments. A credit card management plan is relatively easy to join and follow. In most cases, customers manage to deal with their loan within 3-5 years.
What is DMP?
DMP specialists collect all your unsecured loans into one sum, analyze your budget, and define how you can realistically manage your loan. Creditors offer lower charges to create more favorable conditions for borrowers.
At the same time, you should understand that DMP won’t suit everyone. According to the statistics, only 15% of all creditors choose this strategy. To make use of DMP a person should have insolvency of no more than 20-40% of annual income. Among other things, you need to have a stable source of income since you won’t be able to apply for another loan within this period.
How does it work? Each month you have to pay money as was agreed to by the company you work with. Then it shares your payment with the creditors.
How to Enroll in Debt Management Program
To apply for a DMP you need to conduct a counseling session with the chosen company. Nowadays it may occur both online and offline. Your main task is to get prepared for this consultation.
The preparation won’t take much time. In most cases, agencies get clients’ credit scores and history before the session. However, you still may be asked to report about your income, financial problems, and prospects. The session itself usually takes no more than 40 minutes.
During this meeting, credit counselors will help you understand how to manage your budget. Among other things, specialists will tell you whether DMP is a good option for you and give recommendations as to the loan relief.
Pros & Cons of Debt Management Programs
If you are interested in trying DMPs you need to pay attention to its both sides. Among the aspects that make DMP appealing to the borrowers are the following:
- Your interest rate will decrease;
- The well-thought plan will help you settle your loan faster;
- All your loans are calculated into one plan;
- It can help you avoid bankruptcy.
At the same time, you should remember these disadvantages:
- Your loan won’t be written off;
- If you miss a payment, your interest can increase;
- DMP takes between 3 and 5 years;
- Your credit score can become lower;
- You cannot apply for loans during this process.
Read More: What Is Credit Counseling and How Can It Help?
Debt consolidation stands for joining all loans the borrower has into a single one. It is usually done with high-interest credits. This option is popular among clients because it allows for managing loans more efficiently. What’s more, it helps people get lower interest and annual percentage rates.
If you do everything right you will get a chance to reorganize your loans and receive better credit terms and conditions. Thanks to it people can save money and close their credit faster. Sounds interesting, doesn’t it? Let’s get a closer look into loan consolidation together.
What is debt consolidation (DC)?
Debt consolidation is a beneficial solution for people with several loans. Unfortunately, it is a common thing in the USA. A person can have different types of credits such as student, personal, medical loans, mortgage, etc simultaneously.
Under DC rules a borrower acquires one loan based on all credit cards. It means that you will be required to pay only one company. In most cases, it helps to calculate and manage credit effectively.
However, it is not suitable for everyone. You should understand that you will have to pay a big amount of money each month. Consequently, think twice about whether you can afford it. You should look at your income and expenses to understand whether you can qualify for credit card consolidation.
Pay attention: insolvency consolidation and insolvency management are two different things. In the case of a DC, a person takes a new loan, while DM is about working out a plan for settling old credits.
How to consolidate the debt
If you opt for this option you can choose two ways of reaching it. In both situations, you will get a new credit in which the sum of all previous loans will be calculated together.
1. You can get a zero interest rate with a balance-transfer credit card: it means that a person has to transfer all insolvencies to this card and repay the whole sum within the promotional period. However, to make use of this option a person needs to have a good credit score (nearly 700).
2. Apply for a credit cards consolidation loan with a fixed rate: you can use a new loan to repay previous ones. After you do it, you will be required to repay the latest loan within a set period of time. This approach doesn’t set so strict score requirements.
Pros & Cons of debt consolidation
You may mistakenly think that credit card consolidation has only advantages. In fact, like all other solutions, it presents both pros and cons.
Let’s start with the benefits of debt consolidation:
- You can get lower interest and annual percentage rates;
- Loan consolidation allows to reduce the number of payments;
- It makes insolvency easier to manage and pay off;
- It usually brings less stress to the borrowers;
- In some situations, it can improve the credit rating of a borrower.
At the same time you can face the following cons:
- It may be difficult to afford;
- You need to have a high credit score to apply for loan consolidation;
- There may be up-front costs;
- If you miss payments you can be set back even further.
Read More: Debt Consolidation
Debt settlement (also known as credit relief or credit adjustment) is another way to deal with insolvency if you cannot repay your loan. It is a good option that offers many advantages and helps people avoid bankruptcy. It means closing your credit for a smaller amount than you originally need to pay. However, you will have to repay your loan later in full.
Credit settlement can be done by yourself or with the help of an insolvency settlement company. Before choosing this method make sure it won’t harm you. What’s more, pay attention to details while looking for a company to work with your loan. Take into account customer feedback and overall rating.
What is debt settlement?
Debt settlement can be reached via several methods. Borrowers usually apply to companies or lawyers. For their services, clients need to pay a fixed charge or a percentage from their loan.
Even if you close your credit cards for less than you had to, you will be still required to bear additional costs. You should know that loan settlement like all other relief options can seriously harm your credit rating.
Why does it happen so? A borrower deposits just a lump-sum payment to a creditor to get a part of the insolvency written off. This notice will be kept in your credit history for nearly 7 years. If you apply for insolvency settlement, it means that you can’t fulfill your financial obligations. Consequently, lenders can’t trust you.
Debt settlement risks
Debt settlement is a lengthy process that can take between 3 and 4 years. If you think that it will allow you to repay debt faster without putting much effort into it, we have bad news. Like all other loan solutions, insolvency settlement presents some risks.
Firstly, you may be asked to pay for DS services. The sum depends on the state you are living in and usually varies from 15% to 25% of the owed sum.
Secondly, your credit will be lowered considerably. It will make it difficult to get any loan in the future.
Thirdly, the IRS can charge taxes for the forgiven credit if it exceeds $600. It means that it is essential to calculate whether this solution is beneficial for you. Sometimes it is better to consider other relief options.
Pros & Cons of debt settlement
Before you take a decision look at the advantages and disadvantages of loan settlement. Among the benefits that it can bring you are the following aspects:
- You can close your credit faster;
- The part of your insolvency can be written off;
- It can help you avoid bankruptcy;
- Efficient credit management.
At the same time, don’t forget about the cons of loan settlement:
- You can be charged additional late fees;
- Your credit rating will drop;
- Creditors can refuse to approve your application;
- Taxation of frozen loan.
Sources Used in Research for the Article:
- How To Get Out of Debt, Federal Trade Commission,
- Government debt consolidation programs, American Consumer Credit Counseling,
- Debt Management, Bureau of the Fiscal Service,