Professional debt solutions:
Various debt solutions are available to help you get your debts under control. It's vital to understand your options before you make any decisions.
If you don't think you can get back in control of your finances on your own, it's important not to commit yourself to any debt solution before you've discussed your circumstances in depth with a specialist adviser. Once they understand your situation, they should be able to suggest a number of ways forward, and perhaps recommend one as particularly appropriate.
A debt specialist might be able to help you:
- Repay your debts at an affordable amount in the shortest possible time.
- Deal with your creditors more effectively.
- Simplify your finances, combining multiple payments into one (probably lower) monthly payment.
- Negotiate with your creditors, asking them to reduce (or even freeze) the interest your debts are accumulating.
- Get back to financial stability.
Professional debt solutions include:
Debt Management
It may be possible to reduce your monthly payments by negotiating with creditors, asking them to accept lower payments and, where appropriate, reduce or even waive interest and other charges.
You can do this yourself, or you could ask a debt management organisation to help.
Some debt management organisations will provide advice and sample letters, so you're better equipped to talk to your creditors. Others will negotiate on your behalf and handle everything from letters and phone calls to payments - you'll pay them, and they'll distribute the money among your creditors.
However, creditors are unlikely to agree (and debt management organisations are unlikely to be able to help you) unless it's clear that you are:
a) in genuine difficulty and unable to make the payments as originally agreed, and
b) willing and able to pay your debts, with regular - even if reduced - payments
Note that any debt management programme is an informal arrangement - neither you nor your creditors are legally bound by any agreements you make. Individual Voluntary Arrangements (IVAs) and Bankruptcy, on the other hand, are legally binding formal arrangements.
Debt Consolidation Loans
Debt consolidation involves taking out a new loan that's big enough to pay off all / some of your existing debts.
This can deliver significant benefits:
- Making one monthly payment is much simpler than dealing with multiple debts to multiple creditors.
- It can also cost you less every month, if you've:
- used the loan to pay off high-interest debts (e.g. store / credit cards), and / or
- arranged to pay back the new loan over a long time period.
- As a result, you could be less likely to miss payments (which can lead to extra charges and damage to your credit rating).
However, debt consolidation isn't always the best solution.
- If your current repayments are much too high, consolidating your debts might not reduce them by enough to make them affordable. Perhaps you should consider a different solution.
- If you arrange to repay the new loan over a longer time period, the extra interest could increase the overall amount you pay.
- Also, consolidation loans 'free up' lines of credit like credit cards, store cards and overdrafts. If you use this credit to run up fresh debts, you could end up in an even worse situation, as you'll have to repay these new debts every month as well as your consolidation loan.
Administration Order
If you owe under £5,000 and have at least one County or High Court Judgment against you, you can ask the court for an Administration Order. If granted, this will group your debts together, freeze interest and stop creditors from taking action against you.
Please note: if you own a home or other significant assets which could help you pay off your debt, you will not be eligible for an Administration Order.
You'll make just one affordable monthly payment to the court, which will distribute it among your creditors. In general, this will include all non-priority debts, but won't affect priority debts unless the creditors agree.
If the judge doesn't think you will be able to
repay your debt in a reasonable time, he or she may grant a special
kind of Administration Order called a Composition Order, which means some of the debt
will be written off at the end of the term normally 1-3 years. In most cases, a judge will only grant a Composition Order when an Administration Order has been in place for 12 months.
Individual Voluntary Arrangement (IVA)
If you have substantial unsecured debts (normally £15,000 or more) and cannot make your monthly payments - but you have a reliable income, an Individual Voluntary Arrangement (IVA) could be an appropriate way out of debt.
An IVA is a legally binding agreement:
- You agree to spend 5 years (usually) paying a fixed monthly amount, based on what you can afford after allowing for living expenses like rent / mortgage, food, petrol, utilities, etc.
- Your creditors agree (provided you keep up the payments) to write off the debt you cannot afford to repay, and not to take any action against you - including trying to make you bankrupt.
If you decide to enter into an
IVA, you will work with a licensed Insolvency Practitioner (IP) to draw up a proposal stating exactly how much you will repay. If this is
accepted by enough of your creditors, the IVA can begin.
Note that there are several drawbacks to an IVA. It will stay on your credit report for 6 years, making it harder (and more expensive) to get credit. This will not really matter for the 5 years the IVA is running, as people in an IVA are not allowed to take out credit, but it could be an issue in the sixth year. If you own a home, your creditors will almost certainly expect you to release some equity to pay some of your debt. Plus, your IVA could fail if you miss more than 3 payments.
As a legally binding agreement - and a form of insolvency - an IVA is a serious matter. Before you sign anything, you should discuss the pros and cons in detail with a specialist adviser.
Bankruptcy
Any creditor you owe more than £750 (or any creditor who has obtained a CCJ against you) can petition for your bankruptcy.
You can also apply for bankruptcy yourself, if you're struggling with debts that you can't
afford to pay off and you don't think your financial situation is
likely to improve. If the court agrees it's your only way out of debt
in a reasonable timeframe, it will grant a bankruptcy order.
Either way, bankruptcy can legally write off a significant portion of your debts and let you make a fresh start - once it's over, most of your unsecured creditors will have no further claim against you.
However, there are serious consequences in bankruptcy that sould be considered carefully:
- It's highly likely that you'll have to sell your home to pay your creditors.
- You'll probably have to sell any expensive items, including your car (although you may be allowed to keep / buy a cheap car if you need it).
- Although most people are discharged from bankruptcy in 12 months, you may have to keep making contributions to your creditors for up to 3 years.
- If the Official Receiver judges that your behaviour has been questionable, a Bankruptcy Restriction Order (BRO) may be imposed, which can last up to 15 years.
- Your bankruptcy will stay on your credit report for 6 years.
- Your bankruptcy will appear in the newspapers.
- You may lose your job, if you work in certain fields - and if you own a business, it is likely to be closed down.
Bankruptcy is a serious matter. Before you sign anything, you should discuss the pros and cons in detail with a specialist adviser.
Debt consolidation for homeowners
If you have cash tied up in your home, it
could be a good way to consolidate your debts and reduce your monthly
payments.
By securing a debt against your
home, you may be able to get a lower interest rate than you're paying
on unsecured debts like credit cards, store cards and overdrafts.
As with any credit, the amount of cash you can free up depends on your ability to repay. In this case, since you're securing it against property, it also depends on how much equity you own:
equity equals value of home minus amount you owe in mortgages / secured loans
The amount of equity in your home goes up when:
- the value of your home goes up (because house prices are rising or because you've improved your home), and / or
- the amount you owe goes down (because you've paid off more of your mortgage(s) / secured loan(s)).
For example:
Say you bought a £100,000
house a few years ago.
- You put down a £30,000 deposit and took out a £70,000 mortgage - so you owned £30,000 of equity.
- Since then, the price has gone up by £40,000, and you've paid off £10,000 on the mortgage.
- You now owe £60,000 to the bank, but since the house is now worth £140,000, you own £80,000 of equity.
You may be able to access that £80,000 by taking out:
- a Secured Loan - big enough to pay off your unsecured debts, or
- a Remortgage - a new mortgage that's big enough to pay off the first mortgage and your unsecured debts.
Main drawbacks of consolidation
1) You must think VERY carefully - and
seek professional advice - before you borrow money against your home,
as it could be repossessed if you don't keep up the repayments.
2) Debt consolidation can be dangerous if you're not sure that you can avoid using your credit cards, store cards, overdrafts, etc. If you run up fresh debts, you'll be in a worse position than before, as you'll have to repay your consolidation loan / remortgage as well as your new unsecured debts.
3) The repayment term on your consolidation
loan / remortgage may be substantially longer. If so, you'll pay
interest for longer, so you may end up paying more in total.
Main benefits of consolidation
1) Making one monthly payment is much simpler than dealing with multiple debts to multiple creditors.
2) It can also cost you less every month,
if you've:
a. used the loan to pay off high-interest debts
(e.g. store / credit cards), and / or
b. arranged to pay back
the new loan over a long time period.
3) As a result, you could be less likely to miss payments (therefore avoiding extra charges and damage to your credit rating).