Can the Government Write Off My Debt? Best Scheme?

Are you worried about a big debt? You might be wondering if the UK Government can help. You’re not alone in this – every month, over 170,000 people come to our website to learn about ways to deal with debt.

In this article, we’ll explain:

• Government-backed ways to reduce or get rid of your debt.
• Steps to take if you’re worried about debt.
• How an Individual Voluntary Arrangement (IVA), Bankruptcy, and Debt Relief Order work.
• How getting rid of debt affects your credit score.
• Where to find help and advice.

We understand how hard it is to deal with debt, as we’ve been there too. We’ll give you clear, simple advice to help you make the best choice for your situation.

Let’s dive in and learn how the government schemes may help to clear your debt.

Can They Get It Written Off? 

If you’re struggling with debt then, depending on your financial situation, you may be able to get your debts written off by going through a formal insolvency solution. 

Formal debt solutions that involve a portion or all of your debt being written off include: 

• Individual Voluntary Arrangement (IVA) 
• Bankruptcy 
• Debt Relief Order (DRO) 

You still have to make debt repayments if you opt for an IVA. An IVA involves only a portion of your debt being written. 

With bankruptcy and a DRO, all of your debt(s) are written off. 

While these solutions are definitely great tools you can utilise to manage and pay off your debts, they do come with their own sets of risks which you should definitely be aware of. 

Let’s discuss these processes in detail. 

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Debt Forgiveness and Credit Scores 

While it’s true that you can utilise these processes to get your debt(s) written off, it’s important to note that they are going to have an extremely negative impact on your credit score. 

When you opt for a debt solution, it gets logged in your credit file and stays there for 6 years. 

This means that for the next 6 years, you’re going to be facing difficulty obtaining credit. 

It’s important to take the impact on your credit score into account whenever you’re opting for any type of debt solution. 

What Happens If I Ignore It?

From my experience, ignoring your debts only makes your situation worse!

If you ignore letters or emails about your debts, you could miss important information from your creditors. This can include:

• Polite reminders
• Notification that your debt has been handed to a debt collection agency
• Default notices
• Court action or notification of impending court action
• A statutory demand (step 1 of you being forced into bankruptcy).

Keep in mind that fees and interest charges are probably accruing on your debts while you ignore them. These can often land people in persistent debt which can feel impossible to escape!

If you are struggling with debt issues, missed payments, or even can’t afford to go to work, you could benefit from a debt solution. I always recommend that people in this position talk to a debt charity for free financial advice.

How Do I Avoid A Debt Relief Scam?

The easiest way to avoid a debt relief scam is to look up the company on the Financial Conduct Authority’s (FCA) Register.

Any company or person who offers, sells, or maintains a debt management service in the UK must be registered or authorised by the FCA. Making sure that your chosen company is on one of their registers is the easiest way to make sure that you are not going to get scammed.

Using a company that follows the FCA rules means that you have some protections in the unlikely event that things go wrong.

First of all, you can make a complaint to the FCA if you feel that the company you are using is not following their guidelines. You can also make a complaint to the Financial Ombudsman Service (FOS).

Using an FCA-registered company also means that you will have access to the Financial Services Compensation Scheme (FSCS). This means that you will get your money back if the company goes into liquidation or other stages of bankruptcy.

Make sure that you contact your chosen company using their contact information on the FCA website. This will make sure that you are getting in touch with the right company and not a scammer imitating them.

If you are unexpectedly contacted by the company first, hang up the phone and call them back using the contact information on the FCA website. Again, this will make sure that you are in contact with the correct company and not a scam corporation.

What is an Individual Voluntary Arrangement (IVA)?

An IVA is a formal and legally binding agreement between you and your creditors. It’s a solution that can be utilised in England, Wales and Northern Ireland.  When you opt for an IVA, you start making monthly payments towards your debts. You keep making these payments for a certain period of time (typically five years). At the end of this period, any remaining debt that you have is written off by your creditors. 

It’s important to note that the amount you pay as part of your monthly payments is determined by how much you can afford to pay. This is what makes IVAs an extremely viable debt solution for individuals struggling with debt. 

An IVA can only be set up through a licensed insolvency practitioner (IP). Your IP is the individual that helps you set up your IVA and they’re also the ones who manage it from start to finish. It’s also the duty of your IP to ensure you are treated fairly throughout the course of your IVA. 

An IVA is also great because it protects all of your valuable assets. Since it’s legally binding for your creditors, they also cannot take further legal action against you while your IVA is in place.

Examples of legal action that creditors could take otherwise are petitioning for your bankruptcy,  applying for bailiffs to be sent to your home to seize your belongings or getting a County Court Judgment (CCJ) against you. 

Please note, however, that if you are a homeowner, you may be required to release equity from your home in the final year of your IVA. 

If you’re not a homeowner or if you don’t have equity in your home, then your IVA’s duration may be extended by a year. Thus, your IVA would last six years instead of five. 

An IVA is suitable for a person that wants to protect his assets and has the financial resources to at least pay back a portion of their debt. 

For those in Scotland, you would need to look at a Trust Deed.

This is the Scottish equivalent of an IVA and it works in largely the same way. The key difference is that you will deal with a trustee rather than an Insolvency Practitioner.

Bankruptcy 

If you want to write off debt completely without having to pay anything, then bankruptcy is definitely something worth considering. 

When you go bankrupt, almost all of your unsecured debts are written off. Thus, bankruptcy can definitely be appropriate for you if you only have unsecured debts. 

While bankruptcy may seem like a tempting option, there are a number of aspects which you should be aware of. 

Firstly, as I’ve mentioned above, bankruptcy is great to write off debt that is unsecured. If you have secured debts and/or other forms of priority debts, there’s a chance that bankruptcy might not cover them. Thus, you’d still have to make payments towards those creditors even if you’ve opted to go bankrupt. 
Thus, before making a decision about going bankrupt, you must ensure that the types of debts you have are covered by it. 

Some examples of debts that are not covered by bankruptcy include: 

• Magistrates court fines 
• Payments that were ordered under a confiscation order
• Child support fees
• Student loans that were provided to you by the Student Loans Company 
• Debt payments that have been secured with a charging order
• Social fund loans 
• Payments that have resulted due to personal injury or death of another person

Furthermore, there are many other risks of bankruptcy that you need to take into account as well.

Firstly, unlike an IVA, bankruptcy does not protect your assets. So, if you decide to go bankrupt, then your house and your car, as well as other valuable assets you have, will be seized and sold off in order to raise funds for your debts. 

In addition to this, if you have a job in the financial sector, there’s a chance you may lose it if you decide to go bankrupt. Going bankrupt also prevents you from acting as a company director. 

The effects of bankruptcy on employment can be felt in other areas, too. Security services, the police, and the civil service are often reluctant to employ people who have been or are bankrupt.

Just like every other insolvency solution, bankruptcy also stays in your credit file for six years. This means that for the next six years, you’re going to face difficulty obtaining any type of credit such as a credit card, a mobile phone contract, loans, etc. 

Bankruptcy can be the right choice for you if you don’t have a lot of valuable assets to protect and you have no other realistic way of paying off your debts within a reasonable time. It can get your debt written off within a period of three years.

For those in Scotland, you would need to look at Sequestration.

Sequestration is the Scottish version of bankruptcy in England and Wales and works in the same way.

What is a Debt Relief Order (DRO)?

A DRO is a solution that is aimed at people that have low income and very little or no assets. As part of a DRO, your creditors agree to write off debt if your financial circumstances don’t improve in a 12-month period. When you opt for a DRO, your financial circumstances are assessed. If it’s determined that you realistically cannot pay back your debt in a reasonable time, then your DRO is accepted and put in place. 

Once your DRO is in place, the ‘moratorium’ period starts. During this period, all of your debt repayments are frozen. The moratorium period lasts 12 months. Once this period is over, your circumstances are reassessed. If it’s concluded that you still cannot realistically pay back your debts, then those debts get written off. 

While DROs are definitely a great solution, they have very strict eligibility criteria. You can only qualify for a DRO if: 

• Your total debt amounts to no more than £30,000
• Your monthly surplus income amounts to no more than £75. Your surplus income is the money that’s left once you’ve attended to all of your essential monthly costs
• You’ve resided and/or worked in England or Wales in the past three years
• Your assets total up in value to no more than £2000
• Your car is worth £2000 or less (unless you’ve had modifications for a disability)
• You have not gone through a DRO in the last six years.

Keeping these criteria in mind, if you qualify, you can get your debt written off.