Debt Relief Assistance – Complete Guide
For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.
If you’re falling behind with your monthly repayments towards your debts, it can be quite discouraging.
Even so, there are a number of debt relief solutions that you can take advantage of if you reside in the UK.
In this post, I’ll be looking at these debt relief solutions in detail so you can figure out which one would be most suitable for you.
Best Ways of Dealing with Debt
Debt Management Plan (DMP)
Debt management plans allow you to repay your debt at an affordable rate.
As part of a debt management plan, you make reduced monthly payments to your creditors. The amount of money you pay in each monthly payment depends on how much you can afford.
The debt management plan is finished once all of your debt has been paid off.
It is an informal debt relief solution. This means that even if it is put in place, it’s not legally binding for your creditors.
Your creditors can still take legal action against you while your debt management plan is in place. While this is theoretically possible, it’s quite rare and unlikely to happen as long as you keep making your monthly payments on time.
You can get a debt management plan set up yourself or you can employ the services of a debt management agency which will help you set it up.
When looking through debt management companies, be sure to choose an organisation that sets up your DMP for you for free.
Individual Voluntary Arrangement (IVA)
An IVA works in fairly the same way as a debt management plan does with some variations.
Firstly, you make monthly payments for a fixed period of time. This time is typically five years.
When these five years come to an end, any remaining debt that you have is written off by your creditors.
Unlike debt management plans, IVAs are legally binding to debtors and creditors. This means that your creditors are obligated to abide by the terms of your IVA while it is in place.
It protects you from legal action by your creditor(s). Furthermore, it also protects your assets from being seized and sold off.
Bankruptcy would involve your unsecured debts (for example, credit card debt) being completely written off.
There are still certain types of debt which bankruptcy does not cover. If you have any of those types of debts, you’ll still have to keep making payments to them.
Some examples of debts that aren’t covered by bankruptcy include:
- Magistrates court fines
- Child maintenance fees
- Any payments that have resulted due to family proceedings
- Student loans
- Payments you’re obligated to make that resulted due to personal injury or death of someone
- Social fund loans
While bankruptcy may seem like a great debt relief solution since it writes most of your debts off, it has much higher risks which you should be aware of.
Firstly, bankruptcy does not protect your assets. Thus, if you go bankrupt, your assets will be seized and sold off.
You also cannot act as a company director if you become bankrupt. Additionally, If you work in the financial sector and go bankrupt, there is a chance that you may be dismissed from your job.
If you have assets that you want to protect, then bankruptcy is definitely not the option for you.
Debt Relief Order
A debt relief order (DRO) is often referred to as the quicker and cheaper alternative to bankruptcy.
This is because a debt relief order lasts a year whereas bankruptcy typically lasts about three years.
A debt relief order is a debt relief solution that is designed for individuals with low income and very little (or no) assets.
When you enter into a debt relief order, your financial situation is assessed. If it’s determined that you cannot realistically make payments towards your debts, then your payments are frozen.
These debt repayments stay frozen for a year. So, for a year, you don’t have to worry about paying back any money you owe.
Once the year is over, your financial situation is reassessed. If it’s determined that you are still unable to repay your debts, then your debts are written off.
While a debt relief order sounds great, it has the strictest eligibility criteria out of all other debt solutions.
In order to get debt help in the form of a debt relief order, you must have debts that total up to no more than £30,000. You must also have a monthly disposable income that totals up to no more than £75. Finally, you must also have assets that total up to a value of no more than £2,000.
Debt Consolidation Loans
Consolidating your debt refers to taking out one big loan in order to pay off all of your debts.
Then, you would be left with a single debt to a single creditor. Not only does this method make your repayments easier to manage (since you only have one creditor to worry about) but it can also effectively reduce the amount of money you have to pay overall.
Well, when you opt for a debt consolidation loan, opt for one that has a lower interest rate compared to your current debt repayments.
Repaying your debt at a lower interest rate would mean you’re paying less money in the form of interest. Thus, reducing the amount of money you’re paying in total.
This isn’t a “debt solution”, per se, but it’s definitely a method through which you can get your overall debt reduced and make it more manageable.
As you can see, there are a number of different debt relief solutions that you can go for.
However, a solution that may be great for someone else may not necessarily be great for you. This is why it’s important to do your research and seek the proper debt support before opting for any one solution.
You may be able to get great and free advice if you contact one of the independent debt charities currently operating in the UK. Some examples of debt charities you can contact include Stepchange and Payplan.
Whatever agency you approach to get debt advice, just ensure that they are authorised and regulated by the Financial Conduct Authority (FCA).