Falling into debt can be extremely devastating and is something that can impact many different aspects of your life.
Indeed, many people who fall into debt are often unable to get out of it their entire lives.
In this post, I’ll be detailing the options you have to get out of debt if you live in the UK. I’ll also be detailing how certain debt solutions work and when you should opt for a certain one.
Tracking Creditors and Listing Debts
The first step towards becoming debt-free is to be aware of all the debts you have.
Listing down your debts and their details (such as the amount owed and who you owe it to) can be a good starting point towards figuring out how you’re going to manage it.
The first thing you should do when trying to find all your debts is to get a hold of your credit file. Your credit file is maintained by credit reference agencies and contains information about your financial dealings over the past six years.
It will have details regarding your debts in it and you can use it to keep track of any debts which you may have forgotten about.
For other types of debts which may not be mentioned in your credit file, you can look up old letters, emails and documents from your creditor(s) as well as look up old bank account statements for more information about them.
Once you’ve tracked down all the debts you have as well as details regarding who you owe the debts to, you can start contemplating on how you’re going to pay them back.
Debt Solutions and Credit Scores
Before delving into different debt solutions available to you and how they work, I have to make you aware of the effect these solutions will have on your credit score.
Please know that when you opt for any debt solution and it gets approved, it gets logged in your credit file and stays there for six years.
This means that for six years, the mention of that debt solution in your credit file is going to impact your credit rating in a negative way. So, for six years, you’re going to have trouble getting approved for any type of credit such as getting a credit card, a loan, a mobile phone contract, etc.
This is the case for all formal debt solutions such as an Individual Voluntary Arrangement (IVA), Bankruptcy, a Debt Relief Order (DRO) as well as informal debt solutions such as a Debt Management Plan (DMP).
If You Intend to Pay Off Your Debts
If you have the means to pay off your debts but need a framework in order to make the repayments manageable, then there are a couple of debt options you can explore.
The first one being an Individual Voluntary Arrangement (IVA).
An IVA is a formal and legally binding agreement between you and your creditor(s) which states that you will make affordable monthly payments to your creditors for a certain period of time.
This period is usually 5 years.
At the end of these 5 years, any remaining money that you owe to your creditors will be written off.
IVAs are great because they prevent your creditors from pursuing any further action against you (for example, they can’t get a County Court Judgment against you) and your monthly payments are tailored according to what you can afford.
IVAs also obligate creditors to freeze interest and charges on repayments which can save you a lot of money.
Furthermore, it also protects your assets from being seized and sold off.
A debt management plan (DMP) works in fairly the same way that an IVA does except it’s an informal solution.
This means that it’s not legally binding for your creditor(s). They can still pursue legal action against you even if the DMP is in place.
Although that is the case, this rarely happens if you keep making your monthly payment on time.
Unlike an IVA, a DMP usually involves you paying off the entirety of money that you owe. This means that DMPs usually last much longer than IVAs do depending on the amount of money you owe and what your monthly repayments are like.
DMPs are usually opted for by people that can’t qualify for an IVA.
‘Full and Final’ Settlement Offer
If you have a large lump sum of money, you can choose to make one single payment to your creditor(s) in order to clear your debts.
The amount of money you give does not have to be equal to the amount of money you owe to your creditors. It can be lower than that.
In exchange for you providing the large lump sum amount at once, your creditor(s) will agree to write off the rest of the money you owe.
Your creditor(s) are more likely to agree to this if they feel that it’s not worth it to pursue you for your debts through instalments.
If you want more control over the negotiations, you can do them yourself. Otherwise, you can hire a debt settlement company to handle the negotiations for you.
Of course, a ‘full and final’ settlement is more quick and easy than other debt solutions but it’s also much harder to execute as it might take a lot of convincing to get your creditor(s) to agree.
If You Can’t Pay Off Your Debts
If the money you owe is too much and you can’t afford to pay it back within a realistic amount of time, then there are some other debt solutions that you can look towards.
Going bankrupt would involve all of your unsecured debts being written off.
While it’s true that bankruptcy will result in most of your debts being written off, there are certain debts which bankruptcy does not cover.
Make sure that before you opt for bankruptcy, you check whether or not the debts you have are covered by bankruptcy or not.
While bankruptcy may seem like a great option since you don’t have to pay anything for your debts to be taken care of, there are a number of other risks which you need to be aware of.
First of all, your assets are not protected in bankruptcy. When you go bankrupt, all of your valuable assets such as your house and your vehicle will be seized and sold off. This will be done to raise money in order to make up for your debts.
Other than that, if you work in the financial sector, then opting for bankruptcy may result in you losing your job. Consult with your company’s HR department beforehand about what would happen to you if you opted to go bankrupt.
Debt Relief Order (DRO)
A DRO can clear your debts within a year.
It’s a debt solution that is designed for individuals that have low income and very little assets.
DROs are often referred to as the cheaper and quicker alternative to bankruptcy.
While that’s great, it’s important to note that DROs have extremely strict eligibility criteria.
In order to qualify for a DRO, you must have no more than £20,000 of total debt and must be making no more than £50 surplus income every month. You must also not have assets that total up to a value of more than £1000.
If you satisfy the criteria and opt for a DRO, then your financial situation is assessed. If it’s determined that you indeed cannot pay back your debts, then your payments are frozen for a 12-month period.
This period is known as the ‘moratorium period’.
Once the moratorium period ends, your finances are reassessed. If it’s determined that you still have no way of paying off your debts, then they are written off.
Owing money can be a great source of stress and oftentimes, people get flustered and make their situations worse rather than improving them.
This is why it’s important in such cases to take a step back and assess your finances thoroughly.
Be sure to seek debt advice from professionals and not make a hasty decision on your own.