You both have debts, you both know it’s time to tackle them and you want to do this together.
But if one of you has a lot more debt, or a much larger income, or you own different assets, you don’t have to have the same debt solution.
A good debt adviser will help you look at what option each of you needs to get the best result for your family going forward.
This article looks at some of the combinations that can get the best result for couples. The debt solutions considered here are:
- Debt Relief Order (DRO);
- debt management (DMP);
- one partner may be able to repay their debts normally – I’ve called this “the Repay option”.
Why you don’t always get good debt advice
In March 2019, the FCA’s review of debt advice identified this as an area where many debt advice firms need to improve what they do, saying:
Some firms routinely failed to consider or discuss what debt solutions are available and suitable for each customer individually.
It is more work to draw up not just a joint budget, demonstrating that overall the household can’t manage the combined debts, but two individual budgets as well.
Sometimes this may be just sloppy advice and case recording, taking a shortcut to a simple proposal that is actually in the best interests of both clients. But even here the clients should have had a brief explanation of why other options weren’t being considered.
More serious are the cases where the proposed joint solution is not in the best interests of the clients.
This may be a big problem area for IVA firms. It is common where a couple both have debts for interlocking IVAs to be set up. Often referred to as “a joint IVA”, legally these are two separate IVAs with a single budget and a single monthly payment.
One letter from an IVA firm to a couple proposing interlocking IVAs said:
A DRO is not a viable debt solution as the criteria have not been met.
But one of the couple was a stay-at-home mum, with no assets or income apart from some child-related benefits. It seemed very likely to me that she would have qualified for a DRO and her husband could have had an IVA.
This appears to have been dismissed by the IVA firm, either out of ignorance about DROs or because the proposed IVAs would have generated more fee income for them than one IVA and one DRO.
The different possible combinations
IVA & DRO
DROs are a simple way of clearing debts for someone with no assets and very little income. They don’t require any monthly payments, are cheap to set up and the debts are wiped at the end of a year.
A DRO should be a debt adviser’s first thought whenever someone has a low income, where their debts are under £20,000, they are renting and meet the other criteria. Apparently high incomes from disability benefits do not prevent a DRO because the DRO will take account of the extra costs of disabilities.
I can’t think of any disadvantage for one partner having a DRO rather than interlocking IVAs.
The advantages are:
- DROs very rarely fail. The IVA failure rate is now over 25% and rising, possibly heading up to 30%+.
- if the wife gets a DRO and her husband’s IVA fails, or the couple separate, at least her debts have already dealt with.
- by excluding her debts from the IVA, all the disposable income is available to go into his IVA. If he later has problems with his job or health, his creditors may be more likely to accept his IVA being closed early as they will have had a bigger return.
IVA & bankruptcy
This is similar to the IVA & DRO combination if a DRO is ruled out because the client doesn’t meet the criteria.
This combination normally works best where one person would not have to make any monthly payments in bankruptcy. This is very common – five out of six people who go bankrupt don’t make monthly payments.
Apart from not having to make any monthly payments, bankruptcy has the extra advantages over an IVA of certainty – it can’t fail – and being over more quickly.
There is the downside of the high upfront bankruptcy fee. This may seem like an insurmountable obstacle to someone with a lot of debts. But it is usually a much better option to save up the fees while making token payments to your debts rather than rush into a more expensive and much longer term IVA.
A good debt adviser will:
- explain the fees can be paid in instalments;
- look at the client’s options for getting the money for fees.
If someone’s income is high so monthly payments in bankruptcy are likely, it may be simpler to go for interlocking IVAs rather than the couple having to manage payments to the Official Receiver and the IVA.
Without assets to protect, it’s usually better for both parties to go bankrupt!
DRO & bankruptcy
When one partner has under £20,000 in debts and the other has more, the combination of a DRO and bankruptcy avoids two lots of bankruptcy fees.
IVA and DMP
This isn’t a common combination. It needs an unusual combination of circumstances to have one partner who couldn’t afford to make the normal repayments to their debts (the Repay options considered below) but who could make a large enough payment to their debts for a DMP to be quicker than an IVA and still pay their fair share of the household expenses.
If both people have problem debts and one person’s problem is large enough to need an insolvency solution (IVA, bankruptcy, DRO) with all the downsides that brings, it is often best for both partners to be looking for an insolvency solution rather than add the uncertainty of a DMP into the mix.
DRO/bankruptcy and Repay
This works well when one partner with a significant amount of debt has few assets and low income. If that person’s debts are sorted by a DRO or bankruptcy, their partner may not need a debt solution at all. This sometimes isn’t clear to the couple themselves, who are struggling with combined debts that are unaffordable.
The advantage of this combination is that one partner retains a good credit record. This can make renting, car finance or a mortgage a bit easier in the future.
It can also feel like a good emotional solution where one partner has had debts from a previous relationship or a business failure say, giving them a clean start as rapidly as possible and impacting the other partner as little as possible.
I think this combination can be missed when interlocking IVAs are proposed. The creditors of the “solvent” partner have no reason to accept an IVA, but this may not be clear to them if they only see a joint budget.
IVA and Repay
This combination tends to be feasible when both partners are working and one of them has a lot more income compared to their debts than the other one does. The big advantage again is letting one person retain a good credit record.
Also if the couple own a house, this protects the equity of one half of the couple totally, with no concern if the house needs to be sold for some reason or worries about the secured loan clause in IVAs.
The implications of large joint debts
If the couple has large joint debts, and one of them choose a form of insolvency, then and the other one doesn’t, the solvent partner has to repay the debt. See Joint debts – what happens in an IVA/DRO/bankruptcy for details.
IVA firms say they explain this to to some setting up an IVA. But sometimes the message doesn’t get across, and the solvent partner gets a nasty shock when they are chased for the whole remaining debt, not just “their half” of the debt after the IVA has completed.
This doesn’t change the above discussion about when different choices may be sensible. But it makes it important that a solvent partner is well informed about how their partner’s insolvency will affect them.
Your case is of course completely individual and there could be good reasons why an unusual combination would be best for you!
If a debt adviser suggests you both should have a DMP or an IVA, but the two of you have rather different debts/assets/incomes, then ask the adviser whether it would be better for one of you to have a different solution.