How to resolve your debt
Debt can be crippling, but there are a number of ways you can resolve your debt problems – from embarking on a debt management plan to requesting that your debt is written off.
Debt in the UK
At the end of March 2016, people in the UK owed a mammoth £1.474 trillion, according to The Money Charity. According to the Office for Budget Responsibility, by 2021 that figure is predicted to reach £2.551 trillion, pushing average household debt to £94,481.
Debt can have a huge impact on the quality of people’s lives, as well as contributing to anxiety and damaging overall wellbeing. However, there are clear paths you can take to resolve debt. Based on the type and size of your debt, you can choose the options that work best for you.
If you are in financial difficulty, creditors have to treat you fairly, considering what you can afford to pay and over what period of time. If you ask them, they should also consider freezing your interest and charges.
If your debt is primarily credit debt, there are some specific options you can choose. For example, you can informally negotiate an arrangement with your creditors to manage your debt repayment, according to what you can afford to pay.
This route creates a fair and transparent way to manage your payments and is recognised by the courts. You can also alter your payments if your finances improve or deteriorate. However, creditors don’t need to accept an informal negotiation and may take court action. You’ll also have to repay your debts in full and may only be able to repay a reduced amount for a limited period.
Debt management plan
Accepted for credit debt only, with a debt management plan you’ll need to repay at least £5 a month for your non-priority debts. In this circumstance, you make monthly payments to a debt management company which then redistributes this to your creditors on your behalf. You can also start to pay more if your finances improve. The benefit of this option is that you have one consolidated repayment and the debt management company handles payments to your creditors. However, not all creditors will accept this and it doesn’t prevent creditors taking court action against you.
Offers in full and final settlement
Again for credit debt, this is another negotiating tool to reduce your debt. Typically, if you have a lump sum available, you can negotiate with creditors to pay them this sum to reduce your debt and write the rest off. This route can be effective in resolving your financial issues and being able to start with a clean slate. However, it’s critical to get this agreement in writing. Be aware that the debts will still show on your credit file – although marked to reflect the partial settlement.
Writing off debt
If you have no available income, assets or savings, you may be able to convince your creditors to write off your debts. However, you’ll need to persuade them that your circumstances are unlikely to change and that it’s not worthwhile attempting to recover the debt. You may also need to have exceptional circumstances, such as a severe illness, making it inappropriate for them to pursue further action.
It is important to note that it’s unusual for creditors to agree a debt write off and, even if they do, it will still affect your ability to obtain credit in the future.
If you have two or more debts (totalling less than £5,000) as well as a country court or High Court judgement, you can ask for an administration order. This enables you to make a single monthly payment to the court which is then divided up between your creditors. Those creditors can’t then pursue further action, and interest and other charges will be stopped.
Individual voluntary arrangement (IVA)
Although there’s no upper debt limit for an IVA, it’s beneficial if you owe more than £15,000. This can apply to most debts, excluding secured debts, rent, student loans, court fines, maintenance and child support, and is usually enacted over five years. An alternative to bankruptcy, it’s a formal arrangement to pay a stipulated amount over a set time period. This is managed through an insolvency practitioner and is both less public and less complex than bankruptcy. You can also continue to be a director of a limited company, but your IVA will be listed on the Individual Insolvency Register.
Bankruptcy can be applied to most debts, except student loans, court fines, maintenance, child support, budgeting loans and crisis loans. Whether initiated by you or a creditor, bankruptcy means that your valuable assets will usually be liquidated (sold) to repay your debts. If you have no assets, bankruptcy may be a beneficial option, but it will affect your credit rating, and potentially your employment. You could also lose assets and your bankruptcy details will be held in the Individual Insolvency Register.
Debt relief order (DRO)
A DRO can be applied to debt of £20,000 or less, excluding student loans, court fines, maintenance, child support, budgeting loans and crisis loans. You’ll be eligible if you can’t pay your debts, have less than £50 spare monthly income after household bills and less than £1,000 of assets. The benefit of a DRO is that there’s no court hearing, and priority debts such as energy debt and council tax are included. Although a DRO will affect your credit rating, creditors included in the DRO can’t take further action against you.
If you’re struggling to manage your debts, one option is to consolidate your debt by applying to a lender for a loan that will enable you to repay the rest of your debt. You’ll then only be repaying one creditor, potentially making it easier to manage your debt. This won’t affect your credit rating providing you maintain payments, but you’ll need to look carefully at the terms and conditions, including whether the interest rates are fixed or could change.
Having taken a proactive approach to managing your debt, the next step is improving your credit rating and trying to reduce any damage done to it. There are a number of different ways you can improve your credit rating, including some lesser known techniques.
Interested in more information? Check out our ebook Understanding Credit Risk for Dummies