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Monday, 16th March 2009
Whatever the reason for the problem, you need to understand what help is available if you are financially strapped.
We have detailed below the six options available to you when debt problems arise, all these options, except for No.3 where you pay creditors in full, will affect your credit rating.
We also have our very own easy to read debt solutions table. This chart illustrates a summary of possible debt solutions, you can compare the options available to you. We detail which options freezes interest and those that can stop the creditors chasing you for the debts!
Not all will apply, it depends on your level of debt, your assets and how much spare money you have after paying essential bills.
REMEMBER, it is not a crime to be in debt - always insist that you are treated with respect.
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.
You may find our free Do It Yourself (DIY) debt guide helpful .
We also have some very important and Essential do's and don'ts when dealing with creditors / lenders
2. Debt Management Plan (DMP)
You could employ a debt management company (DMC) to help you set up a debt management plan (DMP) with your creditors /lenders. The DMC will do the negotiating 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 debt plan between you and your lenders. Once the debt plan is agreed with lenders you pay the debt management company monthly payments and it, in turn, will distribute payments agreed with your creditors.
Just be aware that some debt management companies will charge you a set up and ongoing monthly fee. For example if your debts in the DMP were £15,000 and you could afford to pay £300 pcm month then you are likely to pay an additional £3,672 on top of your debts. Have a look at our unique 'fee saving debt management plan calculator' to see how much we can save you.
At DebtWizard.com we will refer you to a third party that will not charge you fees this means that every penny you pay in to the plan will go towards clearing your debts.
Take me to Debt Management Plans
3. Debt Consolidation
Debt consolidation is where you are refinancing when 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 such as credit or store cards.
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.
Some people opt for a 0% balance transfer on their credit cards, this can work well but can also backfire in certain circumstances.
You can read more here 0% credit card balance transfers - warning
4. Individual Voluntary Arrangement (IVA)
Simply put, an IVA is a contract between you and your unsecured creditors 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 5 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, any outstanding debt is written off.
5. Debt Relief Orders (DROs) England, Wales & Northern Ireland
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 can be a low cost alternative to bankruptcy. To be eligible you must have unsecured borrowings of less than £15,000, less than £300 in assets and a surplus of less than £50 per month. This qualifying criteria is expected to be revised upwards in October 2015.
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, such as gambling or paying back family and friends ahead of normal lenders.
The Official Receiver (OR) 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 many individuals.
Read more on Bankruptcy
This chart illustrates a summary of possible debt solutions, you can easily compare and discover the best one for you to get help manage that debt.
We detail which options freezes interest, the ones that give debt relief and those that stop the creditors chasing you for the debts!
We also have more helpful links at the bottom of this page.
|Negotiated Agreement with creditors||Debt reorganisation or consolidation loan||Debt Management Plan (DMP)||County Court Administration Agreement (CCAO)||Individual Voluntary Arrangement (IVA)||Debt Relief Order||Bankruptcy|
|Automatically free of the debt?||No||No||No||No, unless the court makes an order of this||Yes, when you have completed the terms of the IVA||Yes, debts are 'discharged' at the end of 12 months subject to certain exceptions. But you still have to pay debts that are not allowed in the DRO, listed later.||Yes, when you are 'discharged', subject to certain exceptions listed later. But you will still have to pay your debts that are not allowed in bankruptcy, listed later.|
|Automatically binding on all unsecured creditors?||No||Only on creditors paid in full||Only on creditors paid in full||Yes||Yes, if your proposal is approved by 75% or more of creditors (having regard to how much is owed to each of them) on the day they consider your proposal.||Yes, but only on creditors included on your application form.||Yes|
|Automatic protection from action by unsecured creditors?||No||No||No||Yes||Yes - upon creditors approving your proposal||Yes||Yes|
|Protection of action by secured creditors?||No||No||No||No||No||No||No|
|Length of time?||No fixed time||No fixed time||No fixed time||Until last payment made||Typically 5 or 6 years for an income based IVA or approximately 12-15 months if a lump sum deal.||Usually 1 year||Usually 1 year but you may have to make payments from your income for up to 3 years|
|Effect on employment?||Probably none||Probably none||Probably none||Probably none||Possibly||Possibly||Possibly|
|Home at risk?||No, but you need to keep up mortgage/rent payments||No, but you need to keep up mortgage/rent payments. NB: if applying for a loan, the provider may wish to secure this against your property.||
No, but you need to keep up mortgage/rent payments
|No, but you need to keep up mortgage/rent payments||Typically an IVA will not require you to sell your home. However, you will be expected to attempt to remortgage the property 6 months prior to the end of the IVA. NB: it is essential that you continue to maintain your mortgage repayments during the IVA.||No, homeowners will not qualify for DRO||May be avoided if you, a spouse/partner or a relative can buy your share of the net worth of your home.|
|Minimum or maximum amount owed?||No||No||None||Anything up to £5000. You must have at least 1 judgement debt.||A typical IVA client will have debts of over £7,000 and a monthly surplus of over £50.00||Maximum amount owed in total is £15,000, subject to exceptions (see later)||No minimum if it is your own petition (£750 if the petition is by a creditor)|
|What types of unsecured debts are owed?||Any||Any||Any||Any||Any, but in practice debts excluded by bankruptcy are usually excluded from IVA.||Any, with certain exceptions, such as fines, student loans and maintenance payments.||Any, with certain exceptions, such as fines, student loans and maintenance payments|
|Credit rating affected?||Possibly||Possibly||Yes (for the duration of the DMP)||Yes (for a period of 6 years from date of commencement)||Yes (for a period of 6 years from date or commencement)||Yes (for a period of 6 years from date of commencement)||Yes (for a period of 6 years from date of commencement)|
|Will it be recorded on a Public Register?||No||No||No||No||Yes||Yes||Yes|
Where can I get debt advice and debt solutions?