The greater a debt, the greater the stress. While this may be true, any level of debt can be a cause for anxiety, and resolving your financial problems should be a priority. Knowing your options and how to best deal with debt will relieve pressure and give you something to aim towards. By focusing on reducing your debt, you are positively dealing with your financial concerns and working towards a better debt-free future.
Firstly, don’t panic. Financial debt problems have solutions – it’s just knowing what they are. Always seek a professional’s financial debt advice before carrying out any of the following steps, as these are merely for information. Not all solutions will apply to your circumstances, so ensure you do your research first.
This involves coming to an agreement with the lender directly, and can cover both small and large debts. You’ll discuss the situation with your creditor, and – if they are willing – can come to an agreement to make lower payments than those which were initially agreed. A standard method for solving debt through informal negotiations is through manageable pro rata payments1.
Free Debt Management Plan
Your creditors and you come to an agreement to pay off your debts. Regular payments are made to a debt management company, who then shares your money out between your creditors. Free DMPs are available via companies such as Payplan and StepChange Debt Charity, meaning all your money will go towards paying off your debts. DMPs rely on your creditors accepting that it will take longer to recoup their money than the original credit agreement, and that you have some spare cash to repay your debts.
You will gain peace of mind that your debts are being repaid, and often creditors will freeze interest rates while you’re using a DMP. It is not legally binding and can be cancelled at any time. DMPs can only be used on unsecured debts (debts that are not guaranteed against your property)2.
Debt Relief Order (DRO)
Aimed at those on low incomes with no valuable assets and debts no higher than £20,000, a debt relief order will freeze your interest and debt repayments for 1 year. If your finances haven’t changed at the end of this period, your priority debts, such as council tax, will be written off. This is provided by the Insolvency Service and costs less than going bankrupt.
You must own no assets over £1,000 (car, property, shares, savings) and have no more than £50 remaining each month, after essential bills and living expenses, to qualify. Not all debts are written off by the DRO. While overdrafts, credit cards, rent, loans, council tax and utilities are included, student loans, social fund loans, child support payments and court fines aren’t and you must still pay them3.
Apply for a DRO through Insolvency Service approved organisations and Competent Authorities. You will be appointed an Official Receiver and you must pay a £90 fee to be paid over 6 months.
Individual Voluntary Arrangement
An IVA is a legally binding agreement that lasts for 5 or 6 years. All debt repayments are combined into one single monthly payment, which is then distributed between all your creditors. This is similar to a DMP, but the IVA is a formal agreement. For this reason, any debts remaining after the full term of your IVA are written off.
An Insolvency Practitioner will assist in setting up your IVA and doing the deal with your creditors. They will then supervise the IVA, but at a cost of around £5-8k. Usually IVA debts are for more than £10,000, but there are no limits to the debt that can be included in this agreement plan4.
Advantages of this type of debt management over bankruptcy is that you will probably get to keep your house and car, although you may need to release equity by remortgaging and you will need to have a stable income to repay your debts.
Debts included in this arrangement are overdrafts, credit cards and store cards, personal loans and VAT and tax owed to HMRC. Debts not included are child support arrears, court fines, council tax arrears, rent, mortgages and secured loans.
This is the last resort and will have serious repercussions on your life. Consider all alternatives and seek professional advice before even enquiring about bankruptcy.
Unsecured debts must total more than your assets, such as your home and vehicles, for bankruptcy to be considered.
Sometimes, your creditors will claim you are bankrupt, particularly if you owe more than £5,000. This must be issued by the court, whether you are applying, or your creditor. It costs £680 to apply for bankruptcy via the Insolvency Service.
While bankruptcy can be a good idea if you rent, and have no valuable assets, it can badly damage your credit score5. There are also conditions that must be adhered to, and breaking them could result in your bankruptcy lasting longer than the normal 12 months. These include borrowing over £500 without informing the lender that you’re bankrupt, and promoting, creating or managing a company without court permission.
There are several other options you can explore to repay or write off your debt completely. Seek professional financial debt advice for the best options for your circumstances and manage those debts once and for all.
This involves applying for a large, low-interest loan to cover multiple existing debts, allowing you to pay these off at once. As such, all debts become swallowed into one ‘affordable’ loan, and you are then only dealing with one creditor. To get a consolidation loan, your new lender will most likely want to secure the credit against some equity – such as your property6. When arranging this loan, ensure that the monthly repayments are less than that which you were paying for your original debt (or you’ll be worse off!). Likewise, be certain that you can afford to pay these off without fail each month.
1 NationalDebtLine.org Dealing With Your Non-Priority Debts 2 NIdirect.gov.uk Debt Management Plans 3 CitizensAdvice.org.uk Debt Relief Orders – What You Need To Know 4 MoneyExpert.com Debts That Can Be Included In An IVA 5 Experian.co.uk Your Credit Report & Bankruptcy 6 MoneyAdviceService.org.uk Debt Consolidation Loans