So you’re in debt, and you are struggling to manage. It is one of the worst feelings in the world. Not wanting to answer the door, or the phone; too scared to talk about it with your friends and family. It can be a real strain on your mental health.
But you are not alone. There are literally millions of people in the same situation as you, and it is important that you know there are several options available that can help you.
The first thing that people think about is bankruptcy. Even for people who know little about bankruptcy, it is a terrifying prospect that they would rather avoid. Bankruptcy is a legal debt solution, in which a licensed Official Receiver takes control of your assets, and your finances, to pay off as much of your debt as possible. This means they can take money from your wages, your benefits and sell your property.
What many people don’t know is that there are a number of other debt solutions available for people struggling with their debts:
Debt Management Plans
‘Debt Management’ is a phrase that a lot of people know, but few really understand what it means. Essentially, it involves negotiating with your creditors to lower the amount that you are paying each month. If you are lucky, they will agree to freeze your interest as well. This means that you can agree on a monthly payment that you can actually afford, and pay off the full amount over a longer period of time.
However, this is not a legal solution, and so creditors are not required to stick to it. It can also take a very long time to clear the debt, which will prevent you from being able to start fresh with your finances.
Individual Voluntary Arrangements
For a more legally binding arrangement when you have over £6000 of debt to more than one creditor, an Individual Voluntary Arrangement, or IVA, may be more suitable for your situation. An IVA will allow you to consolidate your unsecured debts into one affordable monthly payment, paid to a licensed Insolvency Practitioner, who will redistribute the money amongst your creditors. Legally, your creditors will no longer be able to contact you.
The amount of the affordable monthly payment will be based on your genuine income and expenditure, and you will pay this for only 5 or 6 years. After this time, your remaining debts are written off. Unlike bankruptcy, you will not be required to sell your home. However, if it has any equity, then you may be asked to mortgage it to pay your creditors. You could opt for an extra year of payment instead, however.
Debt Consolidation Loans
This is another way to consolidate your loans into one payment, so that you have only one creditor and only one payment to make. Debt Consolidation Loans are not legal solutions, but are initiated and managed by you. You take out another loan, and use it to pay off all your debts, and then repay that loan.
So if you have three loans: one of £500, one £3000, and one £1500. You take out a loan of £5000 to pay off each of those loans. Then you pay back the £5000.
This can be beneficial because large loans often come with smaller interest rates. However, if your credit score is already very poor, this benefit may not apply to you.
If your debts are small enough to be covered by a credit card, you can manually freeze your interest for a limited period of time by using a 0% interest credit card to pay off your debts. However, be aware that after this period of time, the interest rates will be very high, so you should be confident that you can pay them off in that period of time.
Debt Relief Order
Another solution is a Debt Relief Order, or DRO. This is a legal solution for people with less than £20,000 of debt and who have less than £50 in surplus income every month, and assets worth less than £1000. Unfortunately, this is not a lot of people, and the process costs £90.
If you meet those eligibility criteria, then the DRO is a great solution. Your application is submitted by your DRO advisor, and once it is successful, your debts are frozen and you don’t have to make any payments for a whole year.
After a year, if your circumstances have not changed, then your debts are written off. This means if your income has not improved, or your essential expenditure has not reduced, you can become debt free.
However, DROs are only applicable to unsecured debts, you cannot use a DRO on car loans, mortgages or tax arrears.
Here at PRS Update, we understand how it feels to let your money worries dominate your life, but, as you can see, you have many options to consider if you are in debt, and there is bound to be something that suits your situation. So, don’t let yourself worry too much, and don’t let your creditors scare you – you’re going to be alright.