TOP

In Uncertain Times, how do you deal with personal debts?

Personal finance doesn’t have to be stressful. If you’ve made late payments over a number of months or years on loans, credit cards or to any other creditors, it can be difficult to find the right solution to help you move forward. In this guide we will be exploring a number of different methods you can use to help you pay off your debts.

We recommend that you speak to a debt advisor who will be happy to offer you free impartial advice. They will be able to go through a financial health check with you, which looks at your household income and expenditure and suggest ways you could reduce this. For example, they may ask you to cut back on non-essential items or even help you lower your utility bills by switching energy supplier. Once they have gathered all the necessary information about your personal circumstances, and taken into account all of your outstanding debts, the advisor will then be able to suggest what debt solutions are suitable for you. Here are some of the most common options that will be suggested to you:

  • Debt Management Plan (DMP)
  • Individual Voluntary Arrangement (IVA)
  • Debt Relief Order (DRO)
  • Bankruptcy
  • Offer full payment or a final settlement

Debt Management Plan (DMP)

A Debt Management Plan allows people to pay back their debts at an amount that is affordable for them through monthly instalments. The money will go to the plan provider who will be able to speak to your creditors on your behalf and agree the repayment terms. If you have non-priority debts such as overdrafts, personal loans or credit cards, a DMP may be more suitable.

However, it’s important to note that you will be expected to continue paying into this plan until the full outstanding balance has been cleared. So, it may not be suitable for everyone. Compared to other debt solutions on offer, a DMP shouldn’t affect your credit rating as harshly.

Individual Voluntary Arrangement (IVA) 

IVAs are another type of debt solution. Similar to a Debt Management Plan, your insolvency practitioner will calculate what you can afford to pay through monthly instalments. Most IVAs will typically last five or six years, and you will have to continue paying into it for this period.

An IVA is a legally binding agreement between you and your creditors, so If you start missing payments, the IVA could potentially fall through. For this debt solution to be considered viable, most insolvency firms will expect you to have at least £5000+ in debt. Once you come to the end of the IVA, anything that hasn’t been paid off will be written off.

Debt Relief Order (DRO)

A Debt Relief Order is more suitable for those who have a very low income and few assets. The DRO provider will be able to freeze most or all of your debts for 12 months, and if your circumstances do not change during this period, the debt will be written off.

Generally, for a DRO to be considered viable, your disposable income should be less than £50 per month and your total debt should be no more than £20,000. While your debt is frozen, your creditors will not be able to contact you.

Bankruptcy

Bankruptcy is another option, which like most other debt solutions, gives people a fresh start. You will pay a one-off fee which is normally around £750. Any debts that you can prove you owe will be written off. If you have any assets, these will be sold to pay off your debts. This option may not be suitable if you own your own home. Once you declare yourself bankrupt, you will be added to the insolvency register for a period of six years, this will make it difficult for you to access credit during this time.

Offer full payment or a final settlement

If you have the money available to pay off your debts in full, this should always be one of your first considerations. Alternatively, if the amount you have in savings is only able to cover part of your debt, you could ask your creditors if they would accept this and write off the remaining amount.

Your creditors are not obliged to accept this, but they may agree to it because they are likely to receive more money from you through this method compared to some of the debt solutions mentioned above. They may also allow you to make monthly instalments for a set period before writing the remaining balance off.

To summarise, there are a number of different debt solutions available to you. There is no one best option as each choice has its own advantages and disadvantages. It’s highly recommended that you speak to a qualified debt advisor who will be able to take in to account your personal circumstances along with details of your household income, expenditure and outstanding debt.

This information will then allow the debt advisor to present you with the options that are most suitable for you, allowing you to make an informed decision. The advice you are given will be impartial, meaning that no one will criticise you.

Taking the first steps towards a debt free future can be challenging for many, but it can give you and your family peace of mind. Allowing you to move forward towards financial freedom.