2024-05-14 28Hse Editor
Life can be unexpected. Some facing financial difficulties may have no choice but to file for bankruptcy. But this isn’t the only way to eliminate debt. What other methods are there?
Undoubtedly, borrowers get a chance to clear their debts by filing for bankruptcy. However, the ramifications of taking such a step are far-reaching and significant. The affected areas include the applicant's credit score. The applicant’s future job types may also be restricted. Therefore, those who have smaller debts may consider filing for debt restructuring instead of bankruptcy.
Essentially, debt restructuring will not affect the applicant’s daily life. The applicant will need to pay a specified amount of contribution every month. Otherwise, while the restructuring is carried out, the applicant can continue to own property, run a business, hold a professional license, take out insurance or go on a trip.
What is debt restructuring? Debt restructuring is divided into two categories: Individual Voluntary Arrangement (IVA) and Debt Relief Plan (DRP). Both provide financial management services to people with excessive debt to reduce interest burden. The main factors depend on the amount of debt owed and whether legal proceedings will be involved.
The Individual Voluntary Arrangement (IVA) is suitable for people who are on the verge of bankruptcy and owe a large amount of debt. They must obtain the consent of creditors who exceed 75 per cent of the amount owed. Additionally, it is necessary to entrust a lawyer or accountant to conduct an in-depth analysis of the debtor's financial situation. The goal is to establish a plan that can effectively resolve the debt problem, such as extending the repayment period or reducing interest rates. Since it is a legal procedure, the application process takes a long time, and can take up to four to five months.
On the other hand, the Debt Relief Plan (DRP) is suitable for those who owe a small amount of money and do not need to appoint a solicitor to apply, nor does it involve any legal proceedings. Based on their repayment ability, debtors and creditors will discuss and work out a new repayment plan that is acceptable to both parties to alleviate the pressure of repayment. The application process takes about one to two months.
Can the borrower apply for a mortgage after debt restructuring? Theoretically, you can buy a flat and apply for a mortgage immediately after debt discharge. That said, the application’s approval results will depend on the income and the result of the bank's vetting process. This is different from bankruptcy. After the bankruptcy order is discharged, there is no need to wait for another five years to prove that the applicant’s credit score is normal before the previous negative credit score can be eliminated.
However, as debt restructuring may seriously affect your credit score (TU Grade) and may reduce the success rate of banks in granting mortgages, it is best to upgrade your credit rating or pre-approve your mortgage before entering the market. It is important to note that upgrading your credit rating does not mean not using any credit products or services, but rather developing good credit habits.
The most common way to build a habit of making payments on time is to apply for a credit card and make payments, but not to use more than 50 per cent of it. The most important part is to pay off the card on time every month – and not just the minimum payment – to help improve your credit score.
Compared with bankruptcy, debt restructuring has a smaller impact on an individual's life. This makes it a useful alternative to filing for bankruptcy. However, an application is not guaranteed to resolve debt problems. Factors such as excessive debt and failure to reach a consensus with creditors may cause the plan to fail.
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