If you have a lot of debt and you’re struggling with it, it’s understandable to be overwhelmed.
Dealing with debts can seem unfair if you’re unaware of all the options which may be available to you.
Today, I’ll be talking about some debt solutions you can opt for in order to write off some or all of your debt.
What is Unsecured Debt?
Unsecured debt is defined as debt that does not have any type of collateral linked to it. This means that if you default on your debt, then there would be no asset that your creditor could take away from you in order to make up for the debt you were unable to pay.
Some examples of unsecured debts include credit card loans, utility bills, medical bills, etc. Some examples of secured debts are mortgages, car loans, etc.
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There’s 7 debt solutions in the UK, choosing the right one can take years off your debt, but the wrong one can be expensive and drawn-out.
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Is it Possible to Write Off Unsecured Debt?
The simple answer to this is ‘yes’.
The first thing you can try to do is ask your creditor to write off your debts using our free letter template.
However, creditors are under no obligation to write off your debts so you may have to try entering into a debt solution to write off your debts. There are a number of different debt solutions that you could opt for and you may not be able to qualify for some depending on your financial situation.
There are a lot of debt solutions which involve you being able to write off some or all of your unsecured debt.
These solutions are typically granted to individuals who are unable to pay off their debts within a reasonable time frame.
It’s very important that you do your research and assess your financial situation thoroughly before opting for any one debt solution.
This is because different debt solutions are designed to cater to debtors in different types of circumstances.
You may end up in a worse financial position than before if you opt for the wrong debt solution. Hence, it’s important that you thoroughly assess yourself as well as all the options available to you in order to make an informed decision.
Some debt solutions also have very strict criteria in order to qualify. Hence, you should look these up and assess whether you meet those criteria before you even think of applying.
Getting My Debt Written Off Sounds Great. Is There Any Catch?
There is one thing that you should definitely be aware of if you’re thinking of opting for a solution which involves you writing some or all of your debt off. This is that any such solution is most definitely going to have a very negative impact on your credit rating.
Having a poor credit score will then mean that you will have a lot of trouble securing any type of credit in your near future. You will have to spend a lot of time improving your credit score in order to get it back to the same place again.
Hence, you should thoroughly assess what your plans are for the future if you’re thinking of getting your debts written off.
What are Some Debt Solutions Available in the UK?
I will be detailing some debt solutions that you can opt for if you’re struggling with debts and you reside within the UK.
If you’re having trouble choosing which solution would be most suitable for you, I highly suggest getting debt advice from a registered charity such as Stepchange. They have trained professionals that will look at your financial situation and give you great debt advice about which solution to go for. Not only that but they will also help you navigate through the entire application process as well.
Here are some debt solutions that you can for:
Individual Voluntary Arrangement (IVA)
This is a formal and legally-binding agreement between you and your creditor(s) which states that you will keep making monthly payments to them over the course of a certain period (usually 5 years).
Your creditors will agree to write off any debt that may remain at the end of the agreed-upon time period.
A person known as the Insolvency Practitioner is the one who handles your IVA. He/she will be the mediator between you and your creditors and will ensure that you’re being treated fairly throughout the entirety of it.
Many people in the UK opt for IVAs and it’s definitely a very smart way of taking care of your debts.
Not only is it affordable but it also keeps your creditors in check.
The great thing about an IVA is that your creditors can’t pursue court action against you while it’s in place. All of your assets are protected while it’s in place as well.
However, as I mentioned earlier, an IVA will definitely have a severe negative impact on your credit score. It stays within your credit file for six years after it commences.
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If you’re insolvent, you can opt for bankruptcy. Bankruptcy lasts for a lot less time than an IVA does (typically 1 – 3 years). After the duration ends, all of your debt is written off.
While a bankruptcy definitely lasts for a shorter time, it can cost you a lot more than an IVA does. This is because none of your assets are protected when you go bankrupt.
You may lose your home as well as any other valuable assets you may have such as your business or your car.
These assets are distributed among your creditors in order to make up for your debts.
Also, there are certain types of jobs which you cannot have if you become bankrupt. Thus, if you have such a job, you may definitely lose it if you decide to go bankrupt.
Just like an IVA, bankruptcy also has a deeply negative impact on your credit score and you will have a lot of trouble securing any type of credit (such as credit cards) once it’s over.
Debt Relief Order (DRO)
A debt relief order is a solution that is offered to people that have very little assets to their name.
If you have assets totalling no more than £1,000 (£300 if you reside in Northern Ireland) and your debts total no more than £20,000, then you may be able to qualify for a DRO.
There are some other criteria that you need to meet as well such as your disposable monthly income should be no more than £50.
A DRO takes 12 months to process and at the end of these 12 months, you are debt-free.
A DRO stays within your credit report for six years after the day it was created.
As a result, it will make it very difficult for you to secure any type of credit in the future.
Not only that but you may also have trouble securing any type of rental agreement if your landlord performs any type of background credit check.
Hence, you should keep all of these things in mind before you apply to get your debts written off using a DRO.
Full & Final Settlement Offer
A full & final settlement offer may be a prudent option for you if you have a large lump sum of money but don’t have a lot of disposable monthly income with which you could regularly make monthly payments towards your debts.
In a full & final settlement offer, you take care of your debt all at once by giving your creditor a lump sum of money which may be lower than the full amount of money you owe.
In return for this one-time payment, your creditor would agree to write off the rest of your debt to them.
Creditors are likely to agree to a full & final settlement offer if they feel that you won’t be able to repay your debt to them within a reasonable amount of time.
Just like all other solutions I’ve listed above, a full & final settlement offer also has a very negative impact on your credit rating.
Although you may have come to an agreement with your creditors, any action that they may have taken against you in regards to your debt will stay in your credit file for six years after the date they were registered.
While there are a number of different ways to write off your unsecured debts, there are a lot of conditions involved and a number of dangers to be aware of as well.
This is why I always advise people to be completely informed about what they’re getting into before they decide to jump in.
Be sure to understand all of the risks involved with writing off your debts before you opt for such a solution.
*Note: This is a real life example based on a customers’ savings data in October 2020.