How to write off debt

18 May 2015

The UK is a country built on debt and a love of plastic. Recent research from PwC found the average UK household will owe nearly £10,000 in unsecured debts by the end of 2016 while, according to figures from the Bank of England, collectively we owe an eye-watering £14 billion in credit card debt alone.

Jonathan Chesterman, advice manager at StepChange Debt Charity, says spiralling debt issues can cause a huge amount of stress for people and their loved ones.

"Being deep in debt can be an overwhelming experience. People often don't know where to turn and all too often people struggle on in the hope that their situation will get better but in reality they are just getting themselves into a deeper and deeper hole," he says.

"And debt is rarely ever a purely financial problem. It can cause mental health problems, it can impact on people's relationships with friends and family and it can impact on people's ability to do their job."

So what can you do? It might sound like a small and insignificant step but the first action you need to take is to admit you have a problem in the first place. Be honest with those close to you - and yourself - about the predicament you find yourself in.

You will then need to calculate exactly how much you owe and begin to sort your debts between priority and non-priority payments. This, however, is not always as simple as prioritising the largest debt first. Instead, you'll need to ‘triage' your debt to ensure that secured debt, such as your mortgage, or debt that affects your ability to earn a living or could eventually lead to a prosecution, is dealt with first.

After your mortgage should come your gas and electricity bills and then you should deal with any Council Tax arrears you may have - if you don't, the local authority has the power to take you to court for non-payment.

Other high-priority debts include any goods you rely upon during your life. This could be something like a car if you are disabled and need it for mobility purposes; or if you bought your car via a hire purchase agreement and fall behind with the payments, it could be repossessed.

In contrast, non-priority debts include credit card debt, overdrafts, unsecured loans, and the non-payment of water bills.

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Contacting your creditors

The next course of action is to contact your creditors as soon as possible to explain the situation and see what can be done. It's important that your creditors know what is going on - if they don't know you're struggling to pay, then they'll assume you are simply deciding not to meet your repayments and take action against you.

One way they may help is by offering an alternative repayment plan. For example, it might be that your inability to pay is short term due to being off work because you are ill. As a result, your creditor may agree to give you a payment holiday or allow you to reduce your payments until you a fit enough to return to work.

You could also discuss the possibility of increasing the amount of time you have to settle the debt by asking your lender to consider adjusting your payment schedule, giving you more time to pay what you owe.

Remember that most legitimate lenders simply want their money to be repaid, so it is in their interest to help you find a resolution to your problem.


Debt management plans and debt relief orders

If your debt is significant, you may have to inform your creditors about what you can repay in a formal manner through something called a Debt Management Plan (DMP).

A DMP is an agreement between you and your creditors to pay all of your debts, usually drawn up by a third party. You make regular payments to a licensed debt management company, which will then share your money between your creditors.

The best way to do this is via a specialist debt charity such as StepChange. The charity will help you work up a budget so only money you can afford goes back to the creditors on a monthly basis and, unlike many other debt management companies and others that could be considered unscrupulous, won't charge you a fee to do so.

Bear in mind that your creditors do not have to agree to the reduced payments and DMPs can only be used for unsecured debt.

A Debt Relief Order (DRO), meanwhile, is a way for you to have your debts written off if you owe less than £15,000 and have very few assets (less than £300 and less than £50 in surplus income a month) and is viewed as a low-cost alternative to bankruptcy.

You will have to pay a one-off fee of £90 to the Insolvency Service to set it up but you won't pay anything towards your debt and interest payments for 12 months. If your financial situation hasn't improved in that time, then your debts will be written off.

However, you can't apply if you are a homeowner and a DRO will have an impact on your credit rating, too.

Individual voluntary arrangements and bankruptcy

If you are suffering from extreme hardship, then you could consider an Individual Voluntary Arrangement (IVA). It is a formal agreement between you and your creditors to pay back what you owe over a period of time at an amount you can afford.

They usually last five or six years – so a longer time period than a DRO – and at the end of the period any remaining debt is written off. As an IVA is legally-binding, creditors are not able to chase you for the debt once it is in force.

However, an IVA does come at a cost. Because they are set up by an insolvency practitioner, you could be looking at paying up to £7,000 to enter the agreement – including set-up and annual costs. It is likely you will have to use any savings and your personal pension, as well as selling any large-value items, to meet the repayments.

It's worth noting that IVAs are really only suitable for people with severe debt whose only other option is bankruptcy. They are not a quick-fix solution as you'll have to repay your debt, albeit at a reduced level, via the IVA for years.

That said, if you have debts that are so large that you simply cannot repay them and your situation is unlikely to change in the foreseeable future, then you may have no choice but to declare yourself bankrupt.

Once you have been made bankrupt, an ‘Official Receiver' will take control of your finances, including any assets you have, and it will also deal with your creditors on your behalf.

Usually the slate is wiped clean after 12 months and the money you owe is written off. However, this is no easy solution to your financial troubles, as it comes with long-term, serious implications for your finances and career prospects.

Firstly, there is the upfront fee of up to £705 in England and Wales, so not all debtors can afford to do it. In addition, it's likely any assets you have will be included in your bankruptcy, while you will also be disqualified from running a business and banned from certain job roles – such as those in financial services.

Your bankruptcy will also remain on your credit file for six years, so you will find it very difficult to borrow money in the future.

Debt advice

All of the agreements come with pros and cons and none of them should be entered into lightly. Whatever you do, make sure you seek advice from debt professionals to see what would be the best option for you and don't bury your head in the sand.

Chesterman says: "Getting advice is an essential part of this process. People need to make sure that they're choosing a solution that is the right fit for their individual circumstances and they need expert advice to help them through each step of the process.

"Getting out of debt can be difficult but the support and knowledge of experienced advisers can make it a much more manageable process."


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