New option for dealing with debt available soon

As a result of the recession, people are going broke in record numbers as the economic crisis deepens. It's been reported that more than 200 people a day went bankrupt in the last three months of 2008 and there is no sign of this improving.

Furthermore, according to the Citizens Advice Bureau (CAB), a typical householder seeking help has no realistic hope of paying off debts in their lifetime. The charity said that people turning to advisers for assistance owed an average of £16,971 that would typically take them 93 years to pay off. It identified the most common reasons for debt as low incomes, over-commitment, illness or disability and job loss.

It goes without saying that for individuals trying to manage debt it can be an extremely stressful time and can have a real negative impact on their mental health and damage their relationships. Taking the correct course of action quickly is therefore vital to resolve all of this. So what are the options?

Up until now, the most common ways of dealing with debt are bankruptcy, IVAs and Debt Management Plans.

• Bankruptcy is the traditional way of escaping overwhelming debt. It ends after one year, but you are likely to lose all your assets including your house to pay something to the creditors. It's often the last resort and costs £495. Debts are wiped out after a year but it will leave a black mark on your credit rating for six years.
• An IVA (individual voluntary arrangement) is a deal between you and your creditors, overseen by an insolvency practitioner. There is less chance of losing your home and less stigma, but involves paying some of your debts in one go or over a number of years. It's designed for people owing more than £15,000 to three or more creditors. An IVA will stop creditors chasing you and protect you from court action, but if you don't keep up the payments you can be made bankrupt.
• A Debt Management Plan is an informal arrangement where you negotiate with creditors to repay debts over a longer period. You pay what you can each month to the company dealing with the people you owe money. Banks may agree to freeze interest charges.

However, a new alternative comes into force in April for those living in England & Wales. Debt Relief Orders are designed to catch people on the downward spiral before they get even deeper in debt and are aimed at people with debts of less than £15,000 but without much surplus income or assets to their name. If you fit this criteria a Debt Relief Order may be for you as well as many others. The Citizens Advice Bureau estimated that a third of its debt cases would be eligible for the new relief, but called for fair treatment by lenders and creditors, as well as for more government schemes to help those in debt without them having to go to court.

Debt experts estimate that 100,000 people could go down this route in the first 12 months. The debt advice industry are lining people up for this as it offers people a chance to draw a line in the sand and get creditors off their backs.

In essence, the Government's proposal is focused at helping Britain's poorest, typically those reliant on benefits or extremely low income, repay their debt. It's expected that the cost to participate in a Debt Relief Order will be £100, which is not only cheaper than bankruptcy but more efficient and easier to understand.

So how does it work? Consumers will be able to apply for a Debt Relief Order with the assistance of an authorised debt counsellor. The counsellor will prepare individual cases to ensure they adhere to the stipulations as laid out by the Debt Relief Order. He will then send it to the official receiver for processing who will be able to authorise it without taking the application before the courts, thereby saving expensive fees.

The Insolvency Register and various credit reporting agencies will have access the individual's records once on the Debt Relief Order. The duration of the order will be 1 year, at the end of which time the debt owed will be discharged leaving the debtor debt free.
The key conditions required for applying for a Debt Relief Order are summarised below, but full details can be found on the Government's Insolvency Web Site.

1. The debtor must be unable to repay their debts

2. The debtor's total unsecured liabilities must not exceed £15,000

3. The debtor's assets must not exceed £300 gross

4. The debtor's disposable income, ie what remains after typical household expenses, must not exceed £50 per month

5. The debtor must be domiciled in England or Wales, or in the last 3 years have been resident or carrying on business in England or Wales

6. The debtor must not have had a Debt Relief Order within the last 6 years.

7. The debtor must not be involved in another formal insolvency procedure.

Once the proper action has been taken in dealing with their debt problem, individuals should look to take more control of their finances going forward. Looking for ways of saving money on all items of expenditure (for example by seeking out saving tips online and elsewhere) and considering using tools such as personal finance software can only help to avoid ending up in debt again later.