The financial world is full of complex terms and phrases and ‘insolvency’ is one of those words that commonly confuses people – especially those who have recently entered or are considering a Debt Arrangement Scheme (DAS).
However, familiarising yourself with what a DAS is and how it works can help you put your mind at ease about the whole process.
By doing your search into the various insolvency solutions available, you can be confident you’ve made the right decision to deal with your debts.
What is a Debt Arrangement Scheme (DAS)?
A Debt Arrangement Scheme (DAS) is a legally binding debt solution designed for people who owe money to multiple creditors and have enough surplus income to make regular debt repayments.
With a DAS, you only repay your debt at a rate you are comfortable with and will never be asked to pay more than you can reasonably afford. This is because your monthly payments are based on your level of surplus income after essential living costs.
Once your DAS has been approved, your creditors won’t be able to contact you or take legal action against you to get you to repay what you owe and all interest and charges on the debt will be frozen.
A DAS can only be managed by a DAS-approved money adviser, who is responsible for communicating with your creditors and ensuring your monthly payments are distributed evenly and on time.
DAS-approved money advisers are money advisers who have been authorised by the Accountant in Bankruptcy (AiB) – the government department responsible for administering personal insolvency solutions.
How does a Debt Arrangement Scheme work?
The process of applying for a DAS is fairly straightforward, but familiarising yourself with the steps involved beforehand can help put your mind at ease.
We’ve put together a brief guide to what you can expect from a DAS below:
Contact a DAS-approved money adviser
The first thing you should do is contact a DAS-approved money adviser to administer and manage your DAS.
They will conduct a thorough review of your income and expenses and let you know whether they believe a DAS is the most suitable debt solution for you.
However, not all money advisers are DAS-approved and it’s your responsibility to find this out when you contact them.
Create a DAS Debt Payment Programme (DPP)
Once your money adviser has a clearer picture of your financial situation, they will work with you to draft a Debt Payment Plan or Debt Payment Programme application.
This is essentially a payment schedule outlining how much debt you have, how much you can afford to pay, and how payment will be made.
The main aim of a DPP is to help your creditors gain a better insight into your financial circumstances and help you stick to a consistent payment schedule.
Obtain creditor approval
From the date your creditors receive your DPP, they will have 21 days to review the proposed terms and accept or reject the suggested payment schedule.
However, even if all your creditors reject your proposed Debt Payment Programme (DPP), this can be overruled if your money adviser believes a DAS would be ‘fair and reasonable’.
Start your DAS
Once you’ve had your Debt Payment Programme approved, you’ll be informed of your first payment date (usually within 42 days) and will be expected to make the same contribution to your money adviser on the same date each month going forward.
This is also when all interest and charges on the debt will freeze, allowing you to focus on repaying your debt without any unnecessary distractions or extra payments.
The key to a successful DAS is sticking to your payment schedule and maintaining open and honest communication with your money adviser.
How long does a Debt Arrangement Scheme last?
With a DAS, you’ll be expected to make monthly payments until you’ve repaid 100% of your debt.
This means that the length of your DAS will depend on how much debt you have and how much you can afford to pay towards it each month.
For example, if you owe £15,000 and have £200 surplus income each month, you’ll need to make monthly payments of £200 for 75 months (six years and three months) until your total debt is repaid.
The average DAS lasts six and a half years but it’s not uncommon for it to last up to 12 years if you have substantial debt and little disposable income.
Furthermore, if your DAS is likely to last up to 20 years, you’ll be advised to seek an alternative debt solution – typically one that writes off a portion of your debt after a set period.
What is an insolvency?
The word ‘insolvency’ refers to the state of being unable to repay your debts as they’re due or within a reasonable time because you don’t have the available funds to do so.
There are two forms of insolvency: personal insolvency and business insolvency. We’ve outlined both types below:
Personal insolvency
Personal insolvency is when you can’t afford to pay your bills in full or on time because your financial liabilities outweigh your total income.
Being insolvent likely means you have more money going out than coming in and require a debt solution to help you repay your debts.
The legal process for being declared insolvent is filing for bankruptcy. This is when your debts are frozen and written off after 12 months if your financial situation doesn’t improve.
Business insolvency
Business insolvency is when a company doesn’t have enough surplus income to cover its outgoings and has fallen into debt as a result.
This can occur for various reasons but usually happens as a result of poor financial management or a lack of adequate bookkeeping.
There are several things you can do to deal with business insolvency but filing for bankruptcy is typically used as a last resort if no other solutions are deemed viable.
Is a Debt Arrangement Scheme an insolvency?
Now that we’ve covered what insolvency means, it’s time to discuss whether a DAS is an insolvency.
Put simply, a DAS is a formal debt solution that can help you deal with your unaffordable debts by consolidating them into manageable monthly payments.
However, because a DAS requires you to have surplus income after your essential living costs, it’s unlikely to be an option if you’re insolvent and have little to no money to spare.
Therefore, if you’ve been declared insolvent, you’ll likely be advised to apply for bankruptcy (sequestration) instead.
During a period of bankruptcy, you won’t be required to make any payments for 12 months and your debt will be written off at the end of this period if your financial circumstances haven’t changed.
What insolvency solutions are available?
If you’re insolvent, there are various debt solutions available to help you deal with your unaffordable debt.
We’ve outlined them below:
Debt Relief Order (DRO)
A Debt Relief Order (DRO) is a formal agreement designed to give you relief from your unaffordable debt and your creditors for a set period (usually 12 months).
During a DRO, you don’t have to pay anything towards the debt and your creditors won’t be able to contact you or hassle you for payment.
Once the DRO period is up, your debts will be written off as long as your financial situation hasn’t improved in this time.
To qualify for a DRO, you must have little to no spare income (typically less than £75), assets of less than £2,000, and a debt level that’s under £50,000.
Sequestration
Sequestration is a form of bankruptcy available in Scotland that can help you write off debts that would otherwise take you several years to clear. There is a one-off fee of £200 required to apply for sequestration.
It works in the same way as bankruptcy in that you won’t be required to make payments towards the debt for 12 months if you’re not financially able to do so.
Only people who currently live in Scotland, have lived in Scotland in the last 12 months, or who have a business in Scotland can apply for sequestration. You must also have at least £3,000 of unsecured debt.
Minimal Asset Process (MAP)
The Minimal Asset Process (MAP) is a way for people in Scotland to declare bankruptcy when they are on a low income and have minimal assets.
During the MAP period – which usually lasts six months – you don’t have to make any payments and your debt will be written off if your financial situation doesn’t change in this time.
The MAP can only be applied for through an approved money advisor.
To be eligible for the MAP, you must be a non-homeowner with debts of less than £25,000 and either be in receipt of benefits for over six months or have no disposable income.
Will a Debt Arrangement Scheme affect my credit rating?
When you enter into a DAS, it will be visible on your credit file from all of the main credit reference agencies (Experian, TransUnion, and Equifax) for six years from the date of approval.
During this time, your credit score will be negatively affected and you’ll struggle to obtain further credit, including a mortgage, loan, phone contract, or even a bank account. This may mean you have to put any big life plans, such as buying a home or starting a business, on hold until your DAS is complete.
This is because lenders view your credit file when deciding whether to approve you for credit and evidence of a DAS indicates past financial troubles that might make them wary of entering into a debt solution with you.
However, it’s worth noting that your credit score will already be damaged by the missed payments or defaults that led to the DAS and it will gradually improve the longer you continue to make payments in full and on time.
Where can I get further advice about insolvency?
Finding yourself in a position where you have outstanding debt but no means of paying it can be daunting, but you do have options.
The most important thing to do is to reach out to a money adviser or debt management company for free debt advice tailored to your financial circumstances.
Even if you’re still reviewing your options, they’ll be able to answer any questions you have and point you in the right direction of the most suitable option for you – whether it’s a Debt Arrangement Scheme or a Protected Trust Deed.
Don’t hesitate to reach out for advice and guidance if you feel like you need it. The sooner you get help, the sooner you can deal with your debt and fix your financial situation for good.
Conclusion
Being insolvent is when you have no money to repay your debts as they’re due. There are various debt solutions available to help you deal with insolvency, including a Debt Relief Order (DRO), Minimal Asset Process (MAP), and sequestration.
Because a DMP requires you to make regular payments towards what you owe, it’s better suited to those who have a certain level of disposable income left over after their essential living costs have been taken care of.
Being in debt with no way of repaying it can be daunting, but there’s always help available. From reaching out for expert advice to entering an insolvency solution, you can regain control of your finances and turn your back on your money worries for good.
