Are Americans Getting A Good Deal From Debt Solutions?

Tuesday, July 7, 2015, 6:00 AM | Leave Comment

What do you do if you cannot afford to pay your debts? If you live in the USA you might start a debt management program. If your debt problems are really serious, you might even think about bankruptcy. In reality, how useful and user-friendly are these debt solutions?

You will not be surprised to learn that the citizens of other countries can also get into problems with debt. Just like in the USA, people in many nations around the world have found it easy to borrow large amounts of money on credit cards or in bank loans. For some people, wherever you live in the world, taking on too much credit inevitably leads to big financial trouble.

Every country has their own unique processes and methods for people to tackle their debt problems. operates in Scotland – a nation in which the government claims to have been very innovative in modernising how people can solve their debt problems. Who gets the better deal? Is it the American in financial trouble with $50,000 of credit card debt, or the Scot who cannot repay £50,000?

Let’s start with debt management programs. If you enter this program in the USA you might get your interest rates reduced, but it’s not guaranteed. You might get fees waived on these debts, but that’s not guaranteed either. You may find yourself paying fees to the organisation that’s handling this debt management program for you. Is this a good deal to get you out of money trouble?

A few years ago, the Scottish government introduced a formal type of debt management program known as the “debt arrangement scheme”. Provided that enough creditor support is received at the start of the process, the person in debt is guaranteed that there will be zero interest and zero fees charged. It’s also possible to enter this scheme entirely for free. Once a debt arrangement scheme is in place, no legal action is possible to recover these debts.

How about bankruptcy in the USA? Chapter 7 bankruptcy puts your assets at risk of being sold, but can also get you out of debt quite quickly. Chapter 13 bankruptcy will reorganise your debt repayments into an arrangement lasting between 3 and 5 years. We understand that it can remain on your credit file for between 7 and 10 years.

In Scotland, becoming bankrupt is also the most serious way to deal with debts. Your assets will also be at risk if you become bankrupt. While bankrupt, if it’s assessed that you can afford to make payments towards your debts, you’ll be required to do so for a period of 4 years. A bankruptcy will only remain on your credit file for 6 years altogether.

So bankruptcy in the USA and Scotland is actually quite similar. However, Scotland also has a popular alternative to deal with serious debt problems. It’s known as a “protected trust deed”.

Trust deeds in Scotland work in a similar way to bankruptcy. You might have to sell certain assets and you might have to contribute towards your debt for four years. However, there’s a key psychological difference that’s important with trust deeds in Scotland… it’s not bankruptcy!

Our own research shows that the word “bankruptcy” is strongly associated with feelings of stigma and shame in Scotland. This can lead people to avoid taking action to deal with debt problems, sometimes to the cost of their health and relationships. Having an alternative to bankruptcy plays an important role in encouraging people to face up to serious debt problems and take control of their financial future.

So… what do you think?

Are the citizens of the USA served well by debt management programs? Or would they be better served if the government created a program that’s more similar to Scotland’s debt arrangement scheme?

Is it OK to have very limited alternatives to bankruptcy for the most serious debt problems in the USA? Or might more Americans be encouraged to tackle serious debt problems if there was an alternative option similar to protected trust deeds in Scotland?

Do the Scottish government’s processes for tackling debt make life too easy on the debtor? Do they mean that people have too few incentives not to get into financial trouble in the first place?

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