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03.04.2018

Does it Pay to Repay Your Debts?

In normal circumstances, the answer to that question is yes: people not only have a legal duty to repay their debts, but also a moral duty to do so. It also makes sense, particularly if you want to keep the bailiffs away from your door or you want to borrow money again in the future and get a competitive rate of interest.

However, when someone cannot repay their debts, a common question that often arises is are forms of personal insolvency like an Individual Voluntary Arrangement or a Protected Trust Deed, better than debt repayment plans, as they only require you to repay for a set period of time, then allow the remainder of the debt you owe to be written off?  Or are you better using a repayment plan where you must repay everything you owe?

The debt management options include solutions like Debt Management Plans and in Scotland, Government backed solutions like the Debt Arrangement Scheme (DAS).

However, a recent report produced by the Scottish Government have raised concerns that repaying your debts in full is not always the correct solution for all consumers and some may have been wrongly advised to enter the Scheme, without either being advised of all solutions or what was most suitable for them.

The report entitled, “Debt Arrangement Scheme (DAS): The Way Forward” recently acknowledged that despite recovering £200 million for creditors, more Debt Payment Programmes (DPP) under the Scottish Debt Arrangement Scheme had failed rather than succeeded.   This means more consumers who participated in the Scheme were still left with debts, unlike those who used other formal remedies like bankruptcy and protected trust deeds, where the clear majority of whom would have been left debt-free by the end of their arrangements.

It also means most participants would not have benefited from the interest freezing features of the Debt Arrangement Scheme, as when a case is revoked, lenders who were included in a DPP are allowed to re-apply any interest, fees and charges that they would have charged, had their debts not been included in a programme.

This revelation comes at a timeous point as the UK Government considers introducing their own formal debt repayment scheme for England, Wales, and Northern Ireland and begs the question, if that scheme is introduced in the same way as in Scotland, will it be better for consumers than what is already available?

So, are you better to repay your debts rather than seeking to get some of them written off using a personal insolvency solution?

Credit Rating and Future Borrowing

With the average time for a DPP in Scotland now being 6.8 years, the Debt Arrangement Scheme is the longest formal debt remedy in the UK, lasting longer than any other formal Scottish debt remedy, such as Protected Trust Deeds (4 years) and Sequestrations (bankruptcy) (4 years) and longer than a standard UK Individual Voluntary Arrangement (5 years).

Despite this, it is clear there are very little benefits in terms of someone’s credit rating for them to enter the Debt Arrangement Scheme over using other remedies such as bankruptcy and Protected Trust Deeds.  The same also applies in the rest of the UK in relation to other repayment options like Debt Management Plans and personal insolvency options like Individual Voluntary Arrangements. When someone defaults on their account, regardless of the reason, it remains on their credit record for 6 years, as does their payment history.

In addition to this, formal debt remedies like personal insolvency and the Debt Arrangement Scheme also strictly restrict how much someone can borrow whilst they are in a programme, so whether someone uses a debt relief or debt management remedy has little effect in this regard.

However, where debt management solutions like the Debt Arrangement Scheme and Debt Management Plans do have advantages is that unlike types of personal insolvency, they do not require consumers to transfer an interest in their assets to trustees, and there is very little chance they will lose their home, providing they continue to pay their rent or their mortgages.

However, if repayment solutions do not leave people debt free, then there is an increased likelihood, even after someone has entered such a solution, that they may still be subject to future legal action by creditors, whether it’s the creditor trying to make them bankrupt or in England, Wales and Northern Ireland applying for a charging order over their home.  This means consumers could still lose their home.

The reality is there is no clear answer as so much depends on someone’s individual circumstances and it is important people receive proper advice. What the new report by the Scottish Government reveals, however, is that debt management, despite often being presented as the less risky option, is not always the case and can often leave people struggling with their personal debts long after others have become debt free using more “risky” options.

It is, therefore, important when someone seeks advice to deal with their debts, they seek advice from services that use all options for helping them and do not use services that try and pigeon hole them into solutions that are more suitable for the company than the customer.

If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.