Debt Help Programs – All You Need to Know, FAQs & More
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Being in debt can be extremely stressful but thankfully, if you live in the UK, you can opt for a debt solution to help you get out of it.
Every year, many people in the UK opt for a debt solution in order to either write off or affordably pay their debt.
In this post, I’ll be looking at how these solutions work and attempting to figure out which one would be most suitable for you depending on your circumstances.
What is Credit Counseling?
Credit counseling is considered to be the process of cooperating with a credit counseling agency to take care of your unsecured debt. Credit counseling can help you in a number of ways.
A credit counseling agency can help you negotiate with your creditor(s) in order to get you lower interest rates, reduced monthly payments and more.
Furthermore, credit counselors can provide you with anything ranging from fundamental debt management advice to helping you set a complete repayment plan for your unsecured debt.
Credit counseling can help you streamline the repayment process by making it easier to pay your debts.
Credit counseling has both benefits as well as pitfalls which you definitely need to be aware of.
The first thing you need to know is that credit counseling is only appropriate for certain types of debt. This is because certain types of debt cannot be included in a debt management plan (more about this process later in the article).
Examples of types of debt that can be included in a debt management plan are credit card debt, personal loans, etc.
Credit counseling may also not necessarily be the most appropriate option for your financial situation.
For example, if you have a respectable credit rating and are able to manage your debt fairly easily, then opting for a balance transfer for your credit card or a debt consolidation loan might definitely be a more appropriate option.
Lastly, many credit counseling agencies don’t help you for free. This is especially troubling since you don’t want to be paying more fees when you’re already having money problems because you can’t pay your debts.
What are the Debt Solutions I can Choose Between if I’m Suffering from Debt Problems?
While all debt solutions are geared towards helping individuals in debt, not all of them may be able to resolve your particular debt problem.
This is why it’s important to research thoroughly and get proper debt advice from professionals so you can make an informed decision to take care of your debt.
For example, some people want to pay off their debt but are unable to do it all at once. For them, a debt solution that allows them to pay off their debt in an affordable way would be suitable.
On the other hand, there are individuals that can’t pay off their debt at all. For them, a debt solution that writes off their debt and allows them to start with a clean slate would be more suitable.
One important thing to note about all debt solutions is the fact that almost all of them are going to have an extremely negative impact on your credit score.
This is because when you opt for a debt solution, it gets recorded within your credit file and it stays there for six years after the date on which it was registered.
This means that for six years, you’re going to face difficulties obtaining credit as creditors will be apprehensive about approving you for credit considering you’ve gone through a debt solution in the past.
Now that you know about the effect debt relief options have on your credit score, let’s start going through them one by one:
Individual Voluntary Arrangement (IVA)
An IVA is a formal debt solution between you and your creditor(s). It’s a legally binding agreement which states that you will make monthly payments towards your debt for an agreed-upon period of time (typically five years).
At the end of this period, any remaining debt(s) that you have will be written off by your creditors.
The amount of money you pay as part of your monthly repayments will depend entirely on what you can afford.
An IVA will protect you from your creditors as your creditors cannot take further legal action against you while your IVA is in place.
Debt Management Plan (DMP)
A debt management plan is an informal debt solution. This means that even if the debt management plan is in place, your creditors can still take legal action against you.
Examples of this include applying for a County Court Judgment (CCJ) against you or petitioning for your bankruptcy.
Debt management plans are quite flexible and you can easily make changes to their terms if your financial situation changes.
If you opt for a debt management plan, you’re going to have to pay back the entirety of your debt. None of it is written off.
Debt management plans can last much longer than other solutions depending on how much debt you have and what your monthly repayments are like.
Debt Relief Order (DRO)
A DRO is one of the debt relief options that are aimed at individuals with low income and little to no assets to their name.
A DRO involves you writing off all of your debt within a year.
While this may seem great, the important thing to note here is that only individuals with low income and little to no assets qualify for it.
In order to qualify for a DRO, you must:
- owe less than £30,000 in debt
- Have a monthly surplus income of less than £75
- Live in England or Wales
- Not have assets more than £2,000
- Not have had a DRO in the last six years
Debt Settlement Offer
A debt settlement offer involves you paying a one-time lump-sum amount to your creditors.
This amount is usually lower than the amount of debt you have but your creditor(s) are willing to accept it when they feel you won’t be able to pay back your debt in a reasonable amount of time if you do it through monthly instalments.
Debt management can be extremely overwhelming for many people but finding and opting for the right debt solution can make things tremendously easy for you.
Just be sure to assess your situation thoroughly before making any decision about how you’re going to be taking care of your debt.