Six ways to deal with debt problems
For some, talking about their debt problems can be difficult and embarrassing. Many people feel they have failed and have let themselves and their family down because of their debts.
At some time debt may affect us all. Those who find themselves financially overstretched may have had a trigger point in their lives, such as redundancy, illness or separation from a loved one that started the cycle of debt.
There are ways everyone can deal with their debts on an everyday level – find out more by reading Moneywise’s guides to deal with debt.
However, if your debts are getting out of hand and cannot be cured by a stricter budget or better money management, then you need to understand what help is available and what your options are.
If you stay as you are and ignore your creditors, your debt will increase and creditors will instigate court proceedings to recover their money. This is often done through an attachment of earnings, where the court orders a sum of money to be deducted from your pay every month until the debt is cleared.
There could also be a County Court judgement (CCJ) issued against you. And the lender could make an application for a charging order to be placed on your property (if you own it) to secure the debt.
Finally, your creditor could make you bankrupt.
Below are six options available to people when debt problems arise.
Not all will be suitable for you - it will depend on your level of debt, any assets you have and how much spare money you have left after paying essential bills.
1. Informal Arrangement
If you are struggling with debt, your first port of call should be your creditors; explain your circumstances, request that they freeze interest and charges and try to negotiate reduced payments.
However, there is no guarantee that a lender will oblige you.
2. Debt Management Company
You could employ a debt management company to do the negotiating with the creditors for you. The firm will act as a go-between for you and the lenders to whom you owe money.
The debt management company will contact the lenders on your behalf and draw up a contract between you and your lenders. Once the contract is ready you pay the debt management company monthly payments and it, in turn, will distribute payments to your lenders. There is a charge for this no matter what debt management company you use.
3. Debt Consolidation
Debt consolidation is where you obtain a new loan, either from the bank or through a secured loan on the house, in order to pay off your existing debts.
This can be useful if you can get a new loan at a far lower interest rate than credit agreements you are currently paying.
However, the downside is that, if you opt for a secured loan, you will be securing any debts on your house – putting this at risk should you default.
You also need to consider the period of repayment; if your new loan has a longer term that your previous debts, then you will end up paying more in interest over the long run.
4. Individual Voluntary Arrangement (IVA)
Simply put, an IVA is a contract between you and your lenders whereby you put forward a proposal outlining your current financial position and make the best offer you can afford, either from current income or from a third party contribution in settlement of all your unsecured liabilities.
Contributions are normally paid monthly, typically over a period of five years.
However a one-off lump sum payment can also be made without the need to make the monthly payments.
If the IVA is accepted by lenders, then the arrangement is legally binding on both you and your lenders and no further interest is added from the date the arrangement begins.
Once you have completed your part of the contract (providing the terms of the IVA are complied with) then the lenders have no recourse over that debt and it is deemed to have been legally discharged.
5. Debt relief orders
Debt relief orders became available on the 6 April 2009, and is a form of insolvency for people that have a certain amount of debt, little disposable income and few assets.
A debt relief order will help to place the least complicated debt discharge cases on a fasttrack through the court system with no personal appearance at court required.
Around 84,000 individuals are expected to have gone bankrupt during 2009 compared with 67,428 in 2008, and even more cases are predicted over the next few years.
But be warned – going bankrupt is not a ‘get out of jail free card’.
Every bankruptcy case is decided upon its merits and you will be assessed to see if you can make a payment under an Income Payments Agreement (IPA) for a period of 36 months from the date of your bankruptcy order.
Your conduct prior to going bankrupt will also be scrutinised to see if you were culpable by taking on credit knowing you could not pay it back.
The official receiver could make you subject to a bankruptcy restriction order and not release you from bankruptcy for a number of years.
That said, bankruptcy is a lawful way of discharging your unsecured debts and it works for many individuals.
All these options, except for debt consolidation where you pay creditors in full, will affect your credit rating
As the name suggests, secured loans require security, or “collateral”, usually in the form of property, a motor vehicle, or another valuable item, as a guarantee for the loan. This effectively reduces the level of risk to which a lender is exposed, as the lender has a claim against your home, or other effects, if you default. Secured loans are often available at competitive interest rates. Types of secured loans include mortgages, logbook loans and some types of hire purchase where the loan is secured on the goods you’re buying and these are repossessed if you default.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
A County Court Judgement is a legally issued strike by a lender against a person who has failed to keep to the terms of a credit agreement, usually by habitually failing to make the payments on a loan, credit card or mortgage. A CCJ will appear on a person’s credit record for six years and will certainly affect future applications for credit.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.