- Making Money
- Staying Sane
- Debt Help
- Types of debt
- Debt Solutions
- Debt Resources
- Debt Charities
The number of debt solutions can be overwhelming. When there are lots of complicated words and processes that you’ve never heard of, it makes dealing with your debt that much more stressful. In this post, I’ll walk you through the five main debt solutions, so that you can get your head around the ins and outs of them. The next step will be to work out which solution might be right for you.
There are lots of different ways to pay off your debt. Here at MoneyNerd, we often talk about the five main debt solutions. That’s because there are five solutions which are the most successful at helping people pay off their debt, and therefore the most common. This is great news for you, as it means you only need to concentrate on getting your head round these five solutions. Let’s get into them.
If you can afford to make the minimum payments on your debt, then this method to become debt-free is almost definitely your best option. The Snowball Method is a reduction strategy: you pay off your smallest debt first, while still paying the minimum payment on the larger debts. Then you work your way up, clearing each debt as you go. The great thing about the snowball method is that it actually improves your credit score, whereas the other options will damage it. I go into more detail here about the Snowball Method.
If you can’t afford to make the minimum payments on your debt, this solution could be for you. With a DMP, you make one monthly payment to your debt management company or charity, and they manage the payments to your creditors for you. It means you keep paying off your debts, but each monthly payment is less than the combined minimum of your debt repayments every month. Furthermore, the lenders often stop charging interest. It’s therefore ideal for a short period if you have, for example, lost your job. Find out more here about what a debt management plan could mean for you.
This solution works well if you owe over £6,000 and need to protect your house from being repossessed. You make monthly payments to an insolvency practitioner (IP). They will then divide the payments between your creditors. These agreements usually last 5 or 6 years, after which all your remaining unsecured debts are written off. I have also written a full guide on IVAs.
A DRO is suitable if you have debts of less thank £20,000, have barely any income and don’t have a house. You don’t need to pay towards most debts in your DRO, and you can’t be chased by creditors. A DRO generally lasts a year. For more info, read my in-depth article on DROs.
Bankruptcy is for many people the fastest way to way to hit the reset button. There’s a lot of stigma around the word ‘bankruptcy’, but don’t be put off. It could be the right thing for you to do. Read more here on Bankruptcy.
Undecided between two solutions? Here I’ve looked at some common options people have to weigh up.