Entering into a debt solution can be one of the most important financial decisions you ever make, but it isn’t without its risks, and you must be confident you’re making the right choice before agreeing to anything.
There are various debt solutions available, all with their own advantages and disadvantages, and making the right decision requires some careful research and consideration.
What is a Debt Arrangement Scheme?
A Debt Arrangement Scheme (DAS) is a formal debt solution from the Scottish Government that can help you repay your unaffordable debt through a series of monthly payments based on how much you can comfortably afford.
Under a DAS, you’ll work with a money adviser to create a Debt Payment Programme or Debt Payment Plan (DPP), which is a payment schedule that shows your creditors (the people you owe money to) how you plan to repay your unsecured debt over a set period. Debt Payment Programmes (DPPs) can only be set up and managed by DAS-approved money advisers.
When you enter a DAS, your money adviser will conduct a review of your income and expenses to calculate your disposable income. This amount will typically be proposed as the amount you can afford to pay towards your DAS each month.
Are you considering a DAS?
How does a Debt Arrangement Scheme work?
Knowing how a DAS works can help you navigate the debt repayment process with confidence. Here is a quick guide to what you can expect when you apply for a DAS:
Contact an approved money adviser
The first thing you must do is contact a money adviser authorised by the Accountant in Bankruptcy (AiB), which is the government department responsible for managing personal insolvencies.
Remember, not every money adviser is authorised by the AiB and it is up to you to ensure the money adviser you choose is DAS-approved and matches what you’re looking for from the debt repayment process.
They will conduct a review of your income and expenses to work out how much you can comfortably afford to pay into your DAS each month.
Draft a DPP
Once your money adviser has a clearer picture of your finances, they will draft a DPP to send to your creditors.
The information contained in your DPP must be carefully reviewed and signed before being sent to your creditors as this will often be your last chance to change your monthly repayment amount.
When you’re happy with your DPP, it will be sent to your creditors for approval and they will have 21 days to accept or reject your proposed terms.
Obtain creditor approval
Although rare, some creditors may reject your DPP if they believe you can pay more than you’re proposing.
However, it’s important to remember that even if your creditors disagree with your DPP, your money adviser can overrule their decision if they’re confident a DAS would be ‘fair and reasonable’.
Lastly, if you need to produce an alternative Debt Payment Programme (DPP), your money adviser can help you do this and, as long as the revised proposal is fair, your creditors won’t be able to stop this being approved.
Start making payments
Once your DPP has been approved and all parties are happy to proceed, your DAS will begin.
Typically, your first payment will be due within 42 days and on the same date each month going forward.
With a DAS, it’s crucial you make payments in full and on time as per your DPP and inform your money adviser as soon as possible if your circumstances change.
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Which debts are covered by a Debt Arrangement Scheme?
Only certain debts can be included in a DAS and checking whether your debts are covered is one of the first things you must do.
Generally, most unsecured debts (debts not tied to an asset or backed by collateral) can be included in a DAS. This includes:
However, most secured debts, court fines, hire purchase agreements, and student loans can’t be included in a DAS and you’ll need to find another way to pay these.
How will a Debt Arrangement Scheme affect my credit rating?
Unfortunately, a DAS can have a negative impact on your credit rating and make it difficult to obtain further credit for several years.
For example, once your DAS has been approved, it will be added to your credit file for six years and your credit score will be temporarily damaged during this time.
Because lenders access your credit file when deciding whether to let you borrow money, evidence of a DAS can make them wary of wanting to enter into another credit agreement with you as it indicates you’ve struggled with debt in the past.
Overall, being in a formal debt solution like a DAS can have a considerable impact on your credit rating and ability to access further credit.
By waiting until your DAS is complete and has been removed from your credit file, you’ll have a better chance of your application being approved.
Remember, while a rejected application won’t necessarily impact your credit score, your credit score can be temporarily lowered if the lender has to conduct a hard inquiry in the process.
What happens if I can no longer afford my Debt Arrangement Scheme?
Because of the way DAS payments are calculated, you should always be able to afford them alongside any other financial commitments you have, such as your essential living costs.
However, financial emergencies can be impossible to predict and it’s normal to worry about the affordability of your DAS when you’re faced with an unexpected expense, such as a home or car repair, medical emergency, or job loss.
When this happens, you’ll usually be given two options: a payment holiday or a variation. We’ve outlined both of these solutions in greater detail below:
Payment holiday
The first thing your money adviser is likely to do when you inform them that your circumstances have changed is to offer you a payment holiday of up to six months.
This is a temporary break from making payments to allow you to decide what your next steps should be without the stress of worrying about where your next DAS payment is going to come from.
Usually, a payment holiday will be approved if you’ve experienced a short-term income shock or your income has been reduced by 50% or more.
Variation
While a payment holiday can give you relief from your debt repayments for a set period, it’s not a permanent solution.
When your circumstances have undergone a more serious change, your money adviser is likely to recommend permanently varying your monthly payments so they’re more in line with your current financial situation.
However, the AiB will usually only agree to a variation if all parties agree that it’s the best solution or you’ve already been given a payment holiday.
What are the advantages of a Debt Arrangement Scheme?
Familiarising yourself with the advantages of a DAS can help you know whether it’s the right debt solution for you.
We’ve outlined the main advantages of a DAS below:
All interest and charges are frozen
From the moment your DAS is approved, all interest and charges on the debt will be frozen and will be written off after you’ve made your final payment.
This can allow you to focus on repaying your debt in manageable instalments without your balance increasing.
Your assets are safe
Unlike other debt solutions, such as bankruptcy, you can rest assured that your assets, such as your home and car, will be safe for the duration of your DAS.
This means that, as long as you keep up with your mortgage repayments, you’ll never be forced to sell your home to pay your creditors.
You can include your partner’s debt
With a DAS, you can include someone else’s debt as long as they’re your partner, spouse, or live at the same address as you.
However, it’s important to remember that both parties will be responsible for repaying the debt in a joint DAS and your credit scores will be equally impacted.
Your creditors can’t contact you
One of the major advantages of a DAS is that your creditors will be instructed to stop contacting you or hassling you for the money owed.
Instead, all communication will be handled by your money adviser who will act as a third party to ensure your monthly payments are distributed evenly among your creditors.
Your total debt is repaid
With a DAS, you’ll be expected to make monthly payments until you’ve repaid 100% of your debt.
But while this may take you longer to repay your debt, you can relax knowing that after your final payment, all the money you owe has been settled.
What are the disadvantages of a Debt Arrangement Scheme?
As well as familiarising yourself with the advantages of a DAS, it’s important to weigh them against the disadvantages.
We’ve covered the main disadvantages below:
Your payments can last up to ten years
Because you’ll be expected to pay all of your debt over the course of your DAS, the length of your payment term will depend on how much debt you have and how much you can afford to pay towards it each month.
This means that, while the average DAS lasts six and a half years, yours can last up to 12 years if you have significant debt.
Your credit rating will be affected
From the date your DAS is approved, it will be added to your credit file for six years and your credit rating will be negatively impacted.
This can make it difficult to get approved for a mortgage or loan and something as simple as taking out a new phone contract or bank account can be challenging.
None of your debt will be written off
Unlike other debt solutions that write off a portion of your debt after a set period, there isn’t an option for debt write-off with a DAS.
However, all interest and charges will be written off once you’ve made your final DAS payment, meaning once they’re frozen, they’re frozen for good.
You’ll have to stick to a budget for a prolonged period
Because a DAS lasts longer than most other debt solutions, you’ll likely need to stick to a budget for longer.
This can feel restricting but it can help you get into the habit of spending within your means and forming healthier financial habits going forward.
You’re not protected from repossession
Although you may be able to include rent and mortgage arrears in your DAS, your mortgage lender or landlord will still be free to start the repossession process if you fall behind on your usual housing payments.
This highlights the importance of maintaining your other financial obligations alongside your DAS payments.
Is a Debt Arrangement Scheme a good idea for me?
Even if you’ve heard success stories of how a DAS has helped a friend, family member, or colleague, it’s important to check it’s suited to your individual circumstances.
Generally, a DAS is suited to those who are struggling to afford their debt repayments and earn enough each month to make a regular contribution towards what they owe.
Similarly, if you like the idea of repaying 100% of your debt over a reasonable period without the pressure of creditor contact or legal action, a DAS is likely to be a good idea for you.
Remember, if you’ve done your research and are still unsure, don’t hesitate to reach out to a debt expert for tailored advice and guidance on which debt solution is best suited to your financial situation.
Conclusion
The best way to know whether a DAS is a good idea is to compare it against your individual financial circumstances, such as your debt level, types of debt, and preferred repayment length.
For example, while a DAS might guarantee total debt repayment and freeze all interest and charges, you can be making payments for up to 12 years and your credit score will suffer for several years.
By reaching out for expert debt help and advice tailored to your financial situation, you can make an informed decision based on your individual circumstances and take the first step towards a debt-free future.
