Debt is something most of us will experience at one point or another in our lives, but very few of us actually discuss. Not only is it sometimes difficult to admit (to others and to yourself) that you’ve fallen into debt, but it’s a topic that few of us are actually qualified to talk about impartially.
It’s also something that’s very specific, and will differ greatly from person to person, so here, instead of seeking to answer all the questions, we’ve instead decided to offer some more general advice. These are some of the general options you might want to consider if you are dealing with debt and are struggling to understand what your next step should be. Note, however, that before you go through with any of the options listed below, you’ll want to open a dialogue with your creditor and see if you can reach an agreement with them directly.
Debt Management Plan (DMP)
As the name suggests, a DMP is effectively a plan set up with a provider that will take all of your disparate debts and compile them into one, simple monthly payment. This is particularly helpful if you have managed to build up a lot of smaller debts (credit cards, overdrafts, etc) and want to keep them organised in one place so you don’t forget about them. You’d be surprised how often that happens! You can set up a DMP either with your existing creditors, or with a third party firm, but whomever you use, there will be setup and handling fees to consider. As previously mentioned, these plans generally exist to cover smaller and less pressing debts, so if you have fallen into serious debts (mortgage arrears, court bills, household bills etc.) then you should look elsewhere.
Debt Relief Order (DRO)
This is one of the best options to take if you are either on low income or don’t own many assets, and it exists in order to make sure that vulnerable people don’t fall through the cracks after they fall into debt. To be eligible for a DRO the complete sum of your debts must be less than £20,000, you must have less than £1,000 in savings and you must have less than £50 coming your way each month after necessary household bills have been deducted. If you apply for a DRO and are successful, then your debts will be frozen until your circumstances improve, and if they don’t improve in a year, the debts could be written off completely.
Individual Voluntary Arrangement (IVA
This option will allow you to pay back what you can afford and (perhaps most importantly) pay it back when you can afford it. When you take out an IVA, you will be given a term, which is generally a number of years. If you haven’t paid off your IVA by the end of this term, then your debt should be written off, though the exact details will depend on your specific circumstances. An IVA is generally arranged by your creditor through someone known as an Insolvency Practitioner, who will act as your proxy when dealing with the creditors. Unlike bankruptcy (see below), the primary benefit of an IVA is that you’ll have more direct control over your assets, which will be particularly handy if your debts are related to your rent or mortgage.
File for Bankruptcy
Filing for bankruptcy has an air of finality about it, but the truth of the matter is that it’s gonna a perhaps undeserved bad reputation in recent years. Still, it’s not something you’ll want to consider unless almost all other avenues have been explored and counted out. When you file as bankrupt, any assets you own will be taken to pay off your debts and the debt will be wiped away. The best part is that it’s surprisingly simple to file for bankruptcy. Simply fill out an online form and wait 28 days for the court to make a decision. Both an IVA and filing for bankruptcy are legal processes you’ll undertake to stop your creditors from taking court action against you, so they are very effective options in the case of mortgage arrears, where your home might be taken from you. Note that both do carry something of a black mark with them, so filing for either might mean you struggle to take out further loans in the future and bankruptcy might also harm your job opportunities. Both are only recorded on your credit file for six years, though, so neither last forever!
Offer in Full of Final Settlement
If you have somehow managed to raise enough funds to pay back part of your debt, the creditors might agree to write the rest off in good faith. You could pay this either as a lump sum or in monthly payments to be agreed upon between the two parties.
Write Off Your Debt
This will only happen in extreme circumstances, such as if you have become seriously ill or disabled, have no income, savings or assets, and it looks like your fortunes are not going to be improving any time soon. As such, this is something of a mixed blessing, as it means your debts have been completely cleared, but it generally means they have been cleared because your situation seems bleak.
An admin order or county court order is a legal order issued by the courts that has been agreed upon by you and your creditors. This is generally a more amicable option, but can only be considered if you owe less than £5,000 debt in total. You must also owe at least two separate debts to qualify. The order will generally take the form of a monthly payment agreement set up between you and your creditors.
Before you take any further steps, what we’ve offered here is simply a primer, so you should definitely seek more specific advice. You shouldn’t have to pay for it either, if you look in the right places. There are countless sources, both online and offline, that will offer impartial debt advice that won’t cost you a penny. Granted you won’t have the full, 100% attention of whomever is offering said advice, but for the money (zilch) it’s a service that’s tough to beat. Always consult as many of these sources as possible before coming to your final decision, because you can never have too many informed opinions! Popular services include Citizens Advice Bureau, PayPlan, the Debt Advice Foundation, the National Debtline and StepChange. There are, however, countless other more specialist service available, should either of those services perhaps prove a little too generalised for your needs.