If you’re struggling to manage debts, you’re not alone.
Money problems like debt affect both your credit score and your mental health adversely.
This complete guide will help you manage your debt with a 5-step guide and answer some FAQs so that you may be able to get rid of debts once and for all.
Is it Possible to Manage Debt on Your Own?
Yes. In fact, it is recommended that you should manage personal debt yourself.
Although consulting a professional for money advice is not a bad idea, not everyone of us can afford this help. Moreover, not everyone out there claiming to be a professional is actually one.
So, without further ado, let’s discuss how you can get better at managing debts and money in 5 steps:
A 5-Step Guide to Debts Management
Find Out Where You Stand
- Calculate Your Finances – Net Income, Savings & Debt
Get a calculator and sit down with all your paperwork, because first things first: know where you stand right now.
What we mean by this is to get a clear idea about how much exactly you owe, what your current income is, and how much (if any) you have in savings.
Once you’re done with this, you’ll already notice your head clearing up. No, calculating your finances won’t magically make your problems go away but it will help you in managing debt by letting you know of your options. You’ll know how much you afford to spend and how much you can set aside to pay off your debt.
If you have any savings, make sure to use them to pay off your debts, especially if you’re facing any late payments with interests piling up.
Debt consultants and banks sometimes recommend paying off in instalments. However, if you can afford to pay off all at once, it may actually be your best option.
- Cut Down Costs & Try to Increase Income
The previous step would make you realize just how bad your situation is. Depending upon that, make sure to let go of some luxuries (or even necessities, if things are that bad).
Credit cards are not your friend during a time like this, especially if you’re also facing credit card debt. If you can’t buy something without your credit cards, you probably don’t afford it at all.
In addition to cutting down costs, you should also explore other income opportunities. Look for side hustles or freelance work opportunities to help you with the budget.
- Try to Reclaim any Fees or Charges
Check for any old direct debit/standing orders. This includes months-old gym membership, magazine subscription, etc. You may have forgotten about them, but they haven’t. Now is the time to cancel such subscriptions and let your income reach you in full.
Secondly, if you feel like your bank is overcharging you for breaching your overdraft, look into it and try to reclaim it if there’s been a mistake. This is not uncommon, so banks are usually willing to resolve the matter. If not, you can also take the matter to the Financial Ombudsman.
Lastly, if you ever abandoned a bank or savings account, now is the time to retrace it because you may find some dormant money there as well.
- Check Your Eligibility for Grants, Allowances, etc.
You’d be surprised at the number of grants and allowances you can find with a bit of research.
First of all, get help with your energy bills. A number of energy providers like EDF, Ovo, SSE and Scottish Power willingly provide grants to financially challenged customers. Even if your energy provider doesn’t offer grants, they may still help you out with your payment plan.
Energy providers in the UK are supposed to help you with debt payment plans if you are in energy debt.
Secondly, check your eligibility for tax credits – state benefits that offer money for disabled or low-income workers and guardians who are responsible for children. The amount of money you get depends upon your circumstances.
Tax credits are tax-free which means you don’t necessarily have to be paying tax or National Insurance to be eligible.
Millions of Britons are also eligible for pension credits but fail to claim it. Find out if you’re eligible and top up your pension money.
It’s important to research about any local registered charity as well to get all the help you need with your finances.
- Pay off Debt
- with Low Income
Pay in Instalments – Debt Management Plan (DMP)
This is the best option for people who can afford to pay off their debts, but not all at once. You can set up a DMP for unsecured debts only.
DMP allows you to agree upon a payment plan with your creditors in which you pay off your debt in instalments. You can either set up this agreement with your creditors yourself or through a debt managing company authorised and regulated by the Financial Conduct Authority.
This will also allow you to have some peace of mind because your creditors or debt collectors will finally leave you alone (provided that you keep paying the decided instalments on time, of course).
- with Close to Zero Income
All’s not lost if you don’t have any money at all to pay off your debts. Here are 2 options to consider at this tough time:
It sounds gruesome, but it can get rid of your debts.
If you declare bankruptcy, you’re legally investigated to check whether or not your assets and possessions have enough value to pay off your debts. If not, your interest and the outstanding amount may be excused.
However, keep in mind that you will walk away with a few financial restrictions and an updated credit score. For example, you will only be able to borrow a specific amount of money and may also face added interests on future loans due.
Independent Voluntary Agreement or Debt Relief Order
An IVA is similar to a DMP in the way that both require the debtor to pay a portion of the debt to their creditor. However, unlike DMP, IVA is legally binding.
To be eligible for IVA, you have to have at least ￡6,000 in unsecured debt and must owe money to at least 2 creditors.
Since IVA is legally binding, it will keep creditors from contacting you for good but will also mean consequences for you if you fail to oblige. IVA is only for people living registered in England and Wales, but Scottish people can avail a similar opportunity through another program called the Trust Deed.
FAQs – All You Should Know if You’re Struggling to Pay off Debts
How long does a debt remain collectible for?
In the UK, a debt usually remains collectible for 6 years. This time limit, called the limitation period, starts from your first payment to the creditor or the time you last communicated with them.
The limitation period is longer for mortgage debts and can be up to 12 years depending upon your agreement with the creditor.
I can’t afford debt help, what to do?
They won’t manage your debt for you, but can definitely give you insightful money advice to help you understand your options according to your financial situation.
Can I get debt collectors off my back?
No, you can’t get debt collectors or agencies or creditors off your back until you agree upon some sort of payment plan with the creditor. However, this doesn’t give them the liberty to harass you.
For instance, a debt collector can contact you with the information provided by the original creditor, but they cannot reach you at your workplace or threat you in any way.
Is it a good idea to request creditors for an extension or reduction in debt?
You should always try to remain on good terms with your creditor so that making such requests doesn’t seem completely out of place. They may agree to give you some sort of favour but keep in mind that they are under no obligations to do so.
Can I go to court for not paying debt?
Yes. Your creditor can take you to court if you don’t respond to their letters. You will then be given a court order that will decide how much you need to pay back and how.
The only way to avoid this is to talk to your creditors beforehand yourself and agree upon a payment plan.
In a world like today’s, almost everyone is facing some kind of debt and struggling to pay it off. The first step to managing your debts is to face it right-on – no beating about the bush.
Sit down with a clear head and calculate your finances. Explore which debt solution suits your financial situation, and then act upon it as soon as possible. This is really all you need to manage all your money problems. Good luck!