If you’re stuck with debt, it can seem impossible at times to get your life back on track. However there are a number of practical and easy debt solutions that one can make use of in order to make debt management easier.
In this guide, I’ll be covering some of the most practical and effective debt solutions in the UK. I’ve also added an FAQ section for further clarity.
Let’s get right into it.
Practical and Effective Debt Solutions
This section will cover a list of the best debt solutions in England, Wales, and Scotland. These options range from informal payment plans to formal, legally binding insolvency solutions.
Without further ado, let’s get right into it.
1. Debt Consolidation
A debt consolidation loan is an option that you can go for.
For persons who have difficulties servicing several debts at a time, this is a mechanism administered by the Financial Conduct Authority (FCA). You will consolidate your current loans into a new one with a debt consolidation loan.
The key trick is to ensure that, relative to the loans you have right now, you get a lower interest rate on your newer loan. If the consolidation doesn’t have a better interest rate, there is little to no point in consolidating it.
Debt consolidation allows people to make debt management a lot easier and possibly get out of debt.
For one, you no longer have to keep track of multiple smaller debts, where your money is going, and how much interest you’re paying on each debt.
You can simply combine them into a single, large loan, that you get at a lower interest rate than your current debts, and then just focus on paying that one loan back in monthly payments.
2. Individual Voluntary Agreement
An IVA helps you to opt for partial repayments over a fixed period of time. Your creditors can’t take you to court once you get an IVA, as long as it is legitimate.
A big advantage that an IVA has over other debt solutions is that it gives you greater freedom over your finances and valuables, technically speaking. A lot of your money will definitely be ripped away from you when you go bankrupt, which isn’t the case with IVAs.
On the other hand, applying for an IVA is very challenging.
You’re required to provide information about your income, creditors, debts, and your assets, and even then, you’ll only get a valid IVA once creditors hold 75% if your complete debts agree to the document.
Bankruptcy, as opposed to informal debt solutions, is a legally binding, formal debt solution.
Bankruptcy is a legal procedure where, once approved, you can get all your debts written off.
Once you go bankrupt, you won’t be chased by your creditors or debt collection agencies.
If the procedure is successful, your assets are taken from you and are used to pay off your existing debts.
Even if your assets don’t cover everything you owe, the amount left unpaid will be legally written off and you won’t have to pay it back anymore. You’ll be completely debt-free and will be able to make your own financial decisions.
Even though bankruptcy does allow you a fresh start, it comes with certain financial limitations and restrictions that the court make you abide by.
These restrictions may look like a bad credit rating, an upper-limit on the amount you’re allowed to borrow for a certain period, or other restrictions the court sees fit to make.
4. Debt Relief Order
A Debt Relief Order, or DRO for short, is basically a legal procedure that allows you an extra year’s worth of time to get back on your feet and manage your debts in order to make the repayments.
Technically speaking, a DRO, once approved by the court, gives you a full year where your creditors can’t take you to court or ask you to repay them.
In theory, a DRO should be a win-win, since it not only gives you a whole year to figure out how to pay back your debts, it even prevents creditors from coming after you and threatening court action against you.
However, in practice, a DRO is only applicable on certain types of debt, so it’s not a universally applicable insolvency solution.
Also, it can take quite a hit on your credit rating, so be prepared for the consequences of what you choose to do.
5. Debt Management Plan (DMP)
A debt management plan or DMP for short, is a monthly payment plan that allows you to manage your debts effectively.
It also provides a lot of help in terms of your payment options and the conditions of your debts.
It allows you to set up a monthly payment plan with your creditors where you pay back a percentage of your total debt each month as an instalment.
If you cannot afford to pay your creditors a lump sum amount as your debt payment, it may help you if you are able to set up a DMP that allows you to keep making payments to your creditor at your current interest rate.
A debt management plan can be very useful and help you a lot depending on when you get it and the specific conditions associated with the plan.
If you need help with your debts and don’t want to avail of a regular insolvency procedure, a DMP may just be right for you in helping you deal with your debt.
6. Debt Arrangement Scheme (DAS)
A Debt Arrangement Scheme, unlike bankruptcy, an IVA, or a DRO, is a debt solution that is available only in Scotland.
The way it works is simple. It allows you to pay your debts back to your creditors in the form of monthly instalments.
It can be a very effective tool for your credit rating as well, if you know what you are doing. It can also take quite a toll on your credit score.
FAQs – Frequently Asked Questions
- Where can I get free debt advice?
You can find a variety of debt help organizations that either offer free debt advice physically, over the phone, or even online debt advice.
A lot of debt charities either charge a very minimal fee or provide their services completely free of charge.
Make sure that if you find a debt help company offering free debt advice, it is authorised and regulated by the financial conduct authority (FCA) and that it is not a scam.
- Does a debt relief program hurt your credit score?
Certain insolvency solutions, such as bankruptcy, IVAs, and DROs are likelier to hurt your credit score than an informal solution like a DMP or consolidation.
- Should I go for an IVA?
It depends on your debt problems and if an IVA can help ease them.
Whether one should get an IVA varies from situation to situation.
If you can’t find a way to pay your debts as they are and feel like you may be able to pay them better on a monthly instalment schedule over a period of five to six years, you should get in contact with a company that can offer you an IVA.
On the other hand. If you feel like an IVA will adversely impact your credit score and leave you with very little financial mobility, you may look into other solutions for your specific circumstances.
- Is consolidation right for me?
Consolidation may be right for you if you have a large number of small debts that you are facing a lot of difficulty in paying back.
If it helps you streamline your debts into a single debt and focus all your energies in that direction, consolidation may be right for you.
On the other hand, if you’re getting it at an interest rate that is similar to, or more than the interest rate on your current loans, you’re probably better off not getting the loan and avoiding the setting up fees and charges.
- Which debt solution is the best for me?
Here’s an important bit of debt advice: You should take a careful look at a wide variety of debt solutions and figure out which debt solutions are meant to help deal with your specific scenario.
You also need to figure out if you want a formal insolvency solution or an informal debt program. Bankruptcy, IVAs, and DROs, DAS, and trust deeds can all help you in specific ways.
Consolidation and DMPs have their own unique advantages.
Wrapping it Up
This guide was meant to help you understand the best ways you can go debt free. I discussed various debt solutions, what a debt charity is, how you can regulate your spending habits, where you can find debt help (and free debt help) and more.
I also talked about how insolvency procedures and informal debt management plans help you manage your finances and can even help you improve your credit file. There are lots of debt advisors you can go to for good debt advice
If you have more questions or need more debt advice, feel free to reach out.