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17.04.2018

Debt Arrangement Scheme Pros and Cons

When deciding how to deal with problem debt, there are a lot of factors to consider. This can often make the process confusing. One potential solution, for people living in Scotland, is the Debt Arrangement Scheme. Under this legislation, a qualified money advisor works with you to produce a Debt Payment Plan (DPP). This is an individually tailored repayment plan which is proposed to your creditors, and allows you to freeze all interest and fees on your debt whilst you repay it over a longer period of time that you initially planned. How long this will take will vary, but DPPs will, in the vast majority of cases, last for under ten years.

We outline below the main advantages and disadvantages to consider when deciding whether the Debt Arrangement Scheme (DAS) is the right solution for your needs.

Advantages

  • Legal Protection against Creditors

If none of your creditors object to a DPP proposal within 21 days, they are automatically bound by it. If a creditor does actively reject the proposal, you will still be able to appeal to the Accountant in Bankruptcy (AiB) – the body in Scotland responsible for administering insolvencies. If the AiB finds the proposal to be ‘fair and reasonable’, they can force creditors to accept it. Once a DPP has been approved, your creditors will not be able to take legal action against you, such as petitioning to make you bankrupt, or hassle you for payments beyond your agreed-upon repayment plan.

  • Interest and Fees Frozen

Another advantage of the DAS is that it allows all fees and interest on your debts to be frozen. This makes repaying what you owe considerably easier. It also makes clearing your debts much cheaper than making use of an informal solution such as a DMP (Debt Management Plan). This is because in a DMP your creditors are not obliged to freeze interest and fees.

  • Your Assets are protected

Once your DPP has been approved, your creditors are bound by its terms. This means they cannot petition to make you bankrupt, which could result in the loss of your assets, or seize your assets through bailiffs. The protection of your assets is likely to be of high priority – especially if you are a homeowner – so this is a key advantage of the DAS.

Disadvantages

  • Can incur Fees

Whether or not setting up a DPP incurs a fee depends upon who you approach. Like a DMP, some private firms will charge an initial fee to establish a DPP, and also take a fraction of your monthly payments to cover their administrative costs. Alternatively, you can approach a debt charity to establish your DPP, which can be done free of charge. This is likely to be the best option, since it ensures that every penny you pay goes directly towards paying your debts.

  • Negative impact on your Credit Score

Unlike informal solutions, a DPP is recorded on a publically accessible online register, hence appears on your credit report. This can indicate to credit reference agencies and potential lenders that you have had trouble paying back your debts as you had initially planned in the past. A poor credit score can make accessing further credit in the future considerably more challenging, and when lenders do offer you credit, you are likely to be faced with higher than average interest rates. Rebuilding your credit score can take time, and you will probably not be able to access any credit during the DPP itself.

  • Can take longer than other Solutions

Solutions such as Trust Deeds have a standard length, but the length of a DPP will depend entirely upon a person’s individual circumstances, including the level of their debt and how much they can afford to pay each month. DPPs can last up to ten years, whereas Trust Deeds only last for five or six. This can be an important consideration when choosing your debt solution.

  • No Debt is written off

In a DPP, you will be expected to pay back your current balance in full, unlike with a Trust Deed. Despite interest and fees on the debts being frozen, this can still make the DAS a more expensive way to write off your debts.

For more advice about which debt solution could be right for your circumstances, you can contact a friendly Creditfix advisor by calling 0808 2085 198.