Options for clearing your debt – Scotland
If you’re struggling to pay day-to-day bills, or to keep up with loan repayments and other financial commitments, there are a number of options open to you to help clear your debts. We outline some of the most common options you may have heard of below. However, don’t make any decisions on your own – before you do anything get free, independent expert advice.
Start by getting free impartial debt advice
You don’t need to pay for debt advice – use one of the organisations listed in our guide below. They will help you decide which of the options set out here is most suitable for you in order to help you manage or clear your debts. The best time to seek help to get yourself back on track is as soon as you start to struggle, or when you begin to worry that you will have difficulty meeting your payments.
Options for clearing your debt
There are lots of debt solutions available – which one will be suitable for you depends on your personal circumstances. This article offers an overview of some schemes you may have heard about, but only make your decision after talking to a free debt advice service.
Aside from the options below, you may be able to reach an informal arrangement with the people or organisations you owe money to (also known as your creditors) to make payments based on what you can afford after essential household outgoings. Under this sort of arrangement you would also ask them to freeze interest and charges. A debt charity will talk you through this option.
Effect on your credit score
Be aware that most of the debt options below will have an impact on your credit score, making it harder for you to open a new bank account, get a loan or buy on credit in the future. Talk to a free debt advice charity to understand more, including which option is best for you.
The Debt Arrangement Scheme
The Debt Arrangement Scheme (DAS) is a free debt management solution that allows you to repay your debts over time at a rate you can afford through a debt payment programme (DPP). While you are doing this, you’ll be protected from creditors trying to recover their money.
Who is eligible?
To be able to apply for the Debt Arrangement Scheme, you must:
- normally live or be based in Scotland
- have one or more debts
- apply using a Debt Arrangement Scheme approved money adviser
- have a reasonable amount of money left over after paying for basics such as household bills and food
If you are a couple and have at least one debt for which you are jointly and severally liable you may apply for a joint debt payment programme. Joint and several liability is explained in our guide Taking out a joint debt – what you need to know.
Get free advice first
Your money adviser will also register your intention to apply for a Debt Payment Programme – this is known as in ‘intimation’ and gives you a six-week period where creditors can’t take any further action against you. If your creditors don’t reply within 21 days of receiving the Debt Payment Programme proposal, it will be taken that they have accepted it. If any of them dispute it, the Debt Payment Programme Administrator will decide whether or not this is reasonable.
Debt Management Plan
This is an arrangement set up between you and your creditors whereby you pay back what you can afford on non-priority debts that aren’t secured against your home after taking into account your household bills. It sets out how much you will repay and agrees a timetable for repayment. You normally make one monthly payment to the debt management company that then pays your creditors for you. Debt Management Plans are usually arranged for you by a third party – and many charities and organisations can arrange one for free.
Avoid fee-charging debt management plan providers
As more and more people are facing financial difficulties, more companies have sprung up offering to help people out of their situation. However, many charge a fee and provide the same service that you can get for free from one of the debt counselling charities and organisations listed in our guide below.
A Trust Deed is a voluntary agreement between you and those you owe money to (your creditors) to pay back part of what they owe. It allows you to make monthly repayments against your unsecured debts, typically over a three-year period. Once that period is over, the rest of the debt is written off. Creditors in the trust deed are prevented from adding more interest to the money you owe and from taking further court action against you.
You can apply for a Trust Deed if:
- you have unsecured debts such as credit cards, loans and overdrafts
- you have excess income with which you can pay down your debt, or assets that can be sold to pay down your debt
Set-up and management costs
Did you know?
You don’t need to use a fee-charging debt management company to set up a Trust Deed.
The fees for an insolvency practitioner (trustee) to set up and administer the Trust Deed on your behalf fees usually range from between £3,000 and £5,000 but they could be a lot more if your trust deed is complex. All fees and costs will be deducted from the payments you make.
Get free advice before you apply
You may be approached by fee-charging debt management companies who claim they are able to help with your debts. These firms may recommend a Trust Deed even if it isn’t the best option for you. They will also charge you high fees. Speak to a free debt advice charity before taking out a trust deed. If they think this is the right option for you, they will refer you to an insolvency practitioner, who will set up the Trust Deed for you without charging an advance free.
Bankruptcy (known legally as ‘sequestration’ in Scotland) is a way of dealing with debts that you cannot pay. While you are bankrupt any assets that you have might be used to pay off your debts. After a period of time (usually one year), most of your outstanding debts are written off and you can make a fresh start. You can apply for bankruptcy yourself or a creditor can apply to make you bankrupt.
Applying for bankruptcy
You can apply for your own bankruptcy if:
- you have debts of over £1,500
- you live in Scotland, or have lived in Scotland sometime during the last year
- have not been sequestrated in the last five years
There are three routes to bankruptcy in Scotland. You must show that you are eligible by meeting the following conditions:
- You are eligible for a new type of debt solution called Minimal Asset Process (MAP) bankruptcy. This was introduced in Scotland on 1 April 2015. It replaced a similar route to bankruptcy called Low Income Low Asset (LILA). It is available to those on low incomes whose total assets are worth no more than £2,000. The LILA is no longer a viable route into bankruptcy.
- You are in ‘apparent insolvency’. This means you can’t pay your debts when they are due. To prove apparent insolvency, a creditor must have gone to court and obtained a ruling that you owe the debt to the creditor.
- You have been given a formal ‘certificate for sequestration’ by an approved person, such as an insolvency practitioner or money adviser, to say that you cannot pay your debts as they become due.
Your bankruptcy generally ends when you’re ‘discharged’. This is usually 12 months after the Sheriff Court made you bankrupt. This won’t be received automatically and the trustee (the person who administers your bankruptcy) will produce a report to confirm whether you should be discharged or not.
Eligibility for Minimal Asset Process (MAP) bankruptcy
- Your income is solely made up of income-related benefits such as Income Support, income-based Jobseeker’s Allowance, Working Tax Credits or, in some cases, the new Universal Credit. Or, the amount of money you earn covers your essential living costs but you have nothing left over.
- Your car is worth £3,000 or less.
- You have no single asset worth more than £1,000.
- Your total assets are not worth more than £2,000 in total.
- You must not own or jointly own a house or any other property or land.
How much does it cost?
You must pay a fee of £200 before you apply for bankruptcy. If you cannot afford to pay this as a lump sum, it may be possible to pay it in instalments. To apply for MAP you need to pay a fee of £90. The full amount needs to be paid and there are no exemptions or reductions available.
Call the National Debtline on Tel 0808 808 4000 for free confidential advice on the financial help available.
Who is bankruptcy suitable for?
If you have no real way of paying off your debts, then bankruptcy could be a suitable option. However don’t make this decision alone. Talk to a free debt advice agency first.
If someone applies to make you bankrupt
It’s worth pointing out that most people you owe money to will only make you bankrupt as a last resort. You must owe at least £3,000 (although two or more creditors can apply jointly).
The creditor must have sent you a copy of the Scottish Government’s Debt Advice and Information Package at least two weeks and not more than 12 weeks before they make your petition for bankruptcy. They must also prove that you have gone into apparent insolvency within the last four months.
This is normally done by proving you have been served with either:
- a charge for payment
- a statutory demand, which is a formal warning that you could be made bankrupt if you don’t pay the debt or make an offer to the creditor
Talk to a free debt advice service if someone applies to make you bankrupt.
Offer in full or final settlement
If you have a lump sum that would cover part of your debts, you could ask your creditors whether they would accept a part payment and allow you to write the rest off.
Alternatively, they may allow you to make monthly payments for an agreed period, after which the balance is written off.
In exceptional circumstances where you have no available income, savings or assets – and you can show your creditors that your circumstances are unlikely to improve in future (for example, if you are severely ill) – it may be possible to ask your creditors to write off your debts. Talk to a debt advice charity to find out if this solution could be suitable for you.
More information and help
For more detailed information on each of the debt options outlined above, go to the National Debtline website.
If you’re struggling financially, other help may be at hand to help with day-to-day expenses or other outgoings. There are many benefits available to people on low incomes, but the benefits system is changing so make sure you know what you’re entitled to.