Debt Help: A Guide to Understanding Your Options
Need Debt Help?
When debt repayments become unmanageable – seeking debt help is usually the next best step.
There are many options out there, which are backed by financial institutes and the UK government, which can help individuals get back on track, debt free and in control of their life in a relatively short period of time.
Some of the solutions won’t be viable for the level of debt you may have occurred, but there are solutions for all levels of debt.
Are You Spiralling Into Debt?
Nobody sets out to get into debt. Unfortunately, it is something that can happen easily and can then quickly spiral out of control.
This could be due to unexpected circumstances in life such as personal illness, losing a job, or divorce. It may also be for more controllable aspects, such as unwise spending decisions or turning a blind eye to financial problems.
Different people have their own reasons for why they get into debt. The most important thing you can do is get a handle on your spending.
Once an issue has been established, the most important thing to do is take control.
Those that tend to find themselves in debt problems, normally find themselves relatint to the following statements.
- Consistently spending more earned
- Losing track of monthly spending and have no idea on the size of the debt.
- Struggle with repayments but still use credit cards, or take out new loans.
- Pay the minimum sum required for monthly credit card bills
5 Steps To Becoming Debt Free
The options out there let you consolidate debts into repayments which are manageable, affordable and have been agreed with the creditors. There are a number of options available out there than can support these consolidation loans but it’s wise to seek guidance into how to go about doing this. Here are the 5 steps to becoming debt free:
Step 1: Make a list of debts
To truly assess the severity of the situation, begin to assess matters by making a list of debts and who is owed. List all the mortgage and consumer debts, including credit and store cards, overdrafts, personal, graduate or professional loans and any other personal debt.
Step 2: List debts in order of importance
The consequences of not paying off some debts before others can be more serious. It’s important to outline what the priority debts are.
- Court fines council tax gas and electric bills
- Gas and electric bills
- Mortgage rent or loans secured against your home
- Rent or loans secured against your home
- Council tax
- Personal loans
- Bank loans
- Credit card
- Payday loans
- Money borrowed from friends or family
Step 3: What can be paid
Before creditors are paid back, the new amount needs to be established. A debt help company will be able to support this process and will speak to creditors to identify what is to be paid back.
Step 4: Negotiate with creditors
At this stage, there should already be a clear idea of which are the priority and non-priority debts. It is best to deal with non-priority debts once the priority debts have been dealt with. The money left after paying any priority debts can then distributed across the non-priority debts.
Step 5: Seek free debt advice
Debt repayment is a difficult and exhausting task. Seek advice on the various debt help options that exist to help deal with debt problems from free and independent advisors.
There are various debt solutions that exist to help deal with growing debt issues. They include bankruptcy, credit counselling debt consolidation, including debt management plans and individual voluntary arrangements (IVAs).
1. Declaring Bankruptcy
One of the options for sorting out debt problems is bankruptcy. To apply for bankruptcy, you must owe more money than able to afford to pay. Meaning assets, including property or vehicles, will be sold to pay off debts. When declared bankrupt, creditors will wipe off unsecured debts. Bankruptcy normally last for a period of 12 months, at which point discharged from bankruptcy and outstanding debts are written off.
However, it’s important to note that there can be challenges when you pursue bankruptcy. It can be a costly, time-consuming and also have a big impact on credit rating. There restrictions during the 12 month period and it may also be difficult to take out further credit, as the bankruptcy will remain on a credit file for 6 years.
2. Credit Counselling
All consumers can participate in consumer credit counselling. However, this service doesn’t really offer extensive debt relief. There is a small monthly charge, but credit counsellors will work to lower payments and interest rates – providing short term relief. Although this is an easy debt help option to qualify for, it may not be the best. The short term relief that consumer credit counselling offers often comes at the cost of lengthening the life of the loan.
3. Debt Consolidation
Debt consolidation loans are government backed schemes which combine several unsecured debts into one loan. They provide a one payment structure and the added benefit of a better interest rate. This makes it a debt help option that is favoured by many as it provides the opportunity to make payments to one lender rather than multiple creditors under favourable payment terms.
To be eligible to consolidate debt, the following types of debt must be incurred: credit card loans, personal loans, store cards, payday loans, phone and utility bills.
Debt consolidation involves taking out new credit to pay off existing debts. The benefits of consolidating existing debts include:
- Lowering monthly payments
- Completely writing off up to 85% of debts
- Government-backed scheme
- Consolidate debts into monthly repayment
- Instantly putting a stop to interest and charges from accumulating
- Stop all creditors, collection calls and bailiffs harassment
Unfortunately, not everyone can qualify for these loans because they are – in essence – the same as applying for financing.
By lowering your payments it is likely going to take longer to repay your debts. You should also make sure the company discloses all the fees and charges before signing the agreement. If you are in doubt, seek advice from a debt consolidation expert as to whether this option is right for your current financial circumstances.
Types of debt consolidation
Debt management plan (DPM) – How Can It Help You?
A debt management plan is an arrangement in which debts are paid back to creditors when only small amounts can be paid back each month or, debt will be paid off in a few months.
Debts of under £5000 may be eligible for a debt management plan. Pay back the debt with a set monthly payment, which is divided among creditors. Most debt management plans are managed by a DMP provider who deals with the creditors. A DMP is not legally binding, meaning these are not tied in for a minimum period and can be cancelled at any time.
A debt management plan may be a viable option if the following apply:
- Struggling to pay the monthly repayments on non-priority debts
- Prefer for someone to deal with creditors
- Monthly payment will help budget properly
If a debt management plan is a right solution, it’s important to make sure priority debts come first.
Check the DMP agreement carefully, so there are no surprises with any unexpected terms or fees in the arrangement in the future. If unsure about whether a debt management plan sounds like it’s right, perhaps think about other options for dealing with debts.
Individual Voluntary Arrangement (IVA)
An ‘IVA’ is a formal and legally binding arrangement with creditors, to pay off all, or part of a debt. It is an agreement in which regular payments to an insolvency practitioner (IP) is made, who will divide payments between creditors.
Under this initiative, creditors cannot add interest or charges to outstanding debts. This means that if monthly payments are maintained and the terms of the IVA plan have been followed, at the end of it, all your remaining debts are written off.
An IVA can be flexible to suit an individuals needs. Most debts can be paid off through an IVA but there are some exceptions.
IVA’s are normally used for the following types of debts:
- Bank and building society loans and overdrafts
- Credit cards
- Personal loans
- Store cards
- Charge cards
- Council tax arrears
- Tax debts
- Electricity and gas debts.
Debts that can’t be included in an IVA, are:
- Maintenance arrears that have been ordered by a court
- Child support arrears
- Student loans
- Magistrates’ court fines.
There are no minimum or maximum limits for the number of debts set by the law. However, creditors are unlikely to agree to an IVA unless total debt is more than £5,000. If it is decided an IVA is right, the insolvency practitioner will advise on whether debts are suitable for an IVA.
How does an IVA work?
- Work out how much you owe.
- Work out how much you can afford to pay each month to your creditors.
- That amount is agreed upon by an IP (Insolvency practitioner), which is then proposed to your creditors.
- You pay that amount for up to 60 months (5 years).
- Afterwards, any debt you still owe will be legally written off.
Debt isn’t just a financial problem. It can also feed into other elements of life, including emotions and mental health. Before tackling debts and the associated worry and stress, it is important to ccept that it’s a problem. But it’s important to remember that solutions are wide and varied, from budgeting, freezing interest costs, simple monthly payments to getting free one to one debt advice from insolvency practitioners.
No debt problems are unsolvable. There might not be a quick fix solutions but there’s always a course of action you can take to resolve your finance issues. The earlier you deal with your money issues, the easier they are to deal with.