A reader asked:
I have 5k debts and I’m now on ESA. I’m also a guarantor for my mum’s Amigo loan – could that be included in a Debt Relief Order (DRO)?
But for guarantor loans, it’s more complicated. So this article looks at the different combinations of being the borrower or the guarantor with DROs, IVAs and bankruptcy.
Have you already gone bankrupt or are in IVA or DRO?
Here it usually isn’t worth making a complaint by the borrower:
- If you have already gone bankrupt any refund goes to the Offical Receiver (unless the loans were AFTER your bankruptcy);
- In IVA any refund goes to the IVA firm to go to your creditors and it will not reduce your IVA payments or shorten your IVA
- If you are currently in a DRO, a refund is likely to cause your DRO to be ended.
But remember that your guarantor may be able to complain and get a refund! This won’t affect you at all.
Insolvency when you are the borrower
Your guarantor loan can be included in all forms of insolvency: bankruptcy, DRO and IVAs. But when this happens, the lender will go after your guarantor for the loan repayments…
If you don’t want this, a good option is to you can try to get your guarantor removed from the loan first and then go for one of the sorts of insolvency.
There are two possible routes to get your guarantor removed:
- your guarantor could complain to the lender they should never have been accepted as the guarantor. See How a guarantor can complain for details of this. If your guarantor is not well off and couldn’t afford the loan repayments this may work;
- or you can yourself put in an affordability complaint yourself, saying the loan should never have been given as it was unaffordable for you. See How to complain if you are the borrower for a guarantor loan for a template letter to help you do this. If you win this complaint, interest will be removed from your current loan.
That may not be enough to save your finances, so you may still need a DRO/IVA/bankruptcy. But if the lender agrees (or the Financial Ombudsman decides) that the loan is unaffordable for you, then your guarantor can then ask to be removed as the guarantor because the loan should never have been set up in the first place. This will work even if your guarantor is actually well off and can afford the loan repayments.
Insolvency when you are the guarantor
General points for all three sorts of insolvency
If this guarantor loan is the main cause of your financial problems and you could manage your other debts, don’t rush into any insolvency. Instead look at How to ask to be removed as the guarantor for a loan and see if that might work for you.
If you have already made some payments to the loan, and you win a complaint and are removed as guarantor, then you get all the payments refunded. And a CCJ for the guarantor loan and even a charging order on your house can be removed if you win a complaint.
Here a guarantor loan will be included in your bankruptcy in all cases.
It doesn’t matter if you are paying it all, having to make the odd payment or so far you haven’t had to pay anything. Bankruptcy will get rid of this debt for you.
If you have major financial problems then bankruptcy may be a good option for you. If a DRO isn’t possible and you don’t have a house with equity or other assets to protect, bankruptcy is usually a better option than an IVA would be. Read Bankruptcy – the big questions people ask and then talk to National Debtline about your options.
If you are already paying the guarantor loan it gets treated like any other debt going into your DRO
If you are not already paying the loan, then the guarantor loan cannot be included. As you aren’t paying it this isn’t an actual debt you currently owe but a contingent debt – one which you may owe in the future. Contingent debts can’t be included in a DRO.
What is a DRO looks at the main criteria you have to meet to be accepted for a DRO and who you should talk to about getting a DRO set up. DROs can only be set up by an approved debt adviser who will look at the terms of the guarantor loan and your current situation to make sure the guarantor loan can be included in it.
If you do meet the criteria for a DRO and the guarantor loan can be included, then this is very likely to be your best choice out of the three insolvency options. But your adviser will help you look at the other options to make sure.
A guarantor loan should be included in your IVA, unless there is already a charging order, in which case the debt is secured.
If you are already paying the guarantor loan:
- it gets treated like any other debt going into your IVA;
- some guarantor lenders normally vote against an IVA, so if the guarantor loan is large compared to your other debts it may be difficult to get the IVA approved.
If you are not already paying the loan, then the guarantor loan should still be included:
- if the IVA firm you are talking to says the IVA cannot be included because you are not paying it, talk to a different IVA firm! You do not want to set up an IVA and leave the guarantor loan out of it as that will leave you in a mess if the borrower gets into trouble and you have to pay the guarantor loan.
- when the borrower is still paying the guarantor loan, the “value” of the loan in the IVA vote should be just £1, as it is not known what your future liability will be. So that should make it simpler to get an IVA approved.
Get some good debt advice!
It is always important to get good, impartial debt advice before deciding which form of insolvency is best for you. And this is especially important with a guarantor loan – if you are the borrower, what you decide will affect your guarantor, and if you are the guarantor this article has looked at how your choice can be more complicated.
Don’t use google to decide who to talk to. You are likely to end up talking to a firm that will make money from selling your details to an IVA firm. Instead here is a list of good places to get debt advice.
For debt advisers – there is a good page on the technicalities of the different combinations in the Shelter- Advising Guarantors page on the IMA website. Any free sector debt adviser can register to gain access to this.