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Guide to dealing with debt

Every day we are all surrounded by debt. The money that we use every day to transact with each other is a record of debt, and debt itself actually predates modern currency.

Yet, despite debt having evolved in parallel with civilisation, many individuals are still daunted by the concept of ‘being in debt’. Rather than facing the issues surrounding debt head on, they often choose to ignore the problem, which can make a bad situation much, much worse.

So what should you do if you find yourself struggling with debt?

The most important thing is that you confront your debt issue head on and start planning your return to financial wellbeing. Remember, you are certainly not in a unique or unusual position, but the longer you leave things, the harder it will be to deal with. There are many other organisations that can help you (with no charge) get yourself debt free. This guide aims to help you find them, and plan your strategies for getting debt free, including:

How much debt do you have?

Firstly it is important to understand the full extent of your debt, including loans, credit cards and overdrafts. Work out how much your current debts actually are, and then arrange them into priority and non-priority debt.

Your priority debts will include mortgage payments or rent arrears, council tax bills, gas and electricity arrears, arrears of maintenance, tax arrears, and/or TV licence.

Non-priority debts are everything else (including credit card debt).

Using the information you have collated you should next formulate a budget and financial statement, detailing your household bills and essential outgoings, and work out how much money you have left after all the bills are paid, and your priority debts are paid.


Maximise your income/Reduce your expenditure

Benefits

If you are out of work, on a low income or have a family, you may be entitled to state benefits. Whilst getting information regarding benefits was once a notoriously difficult process, it is now relatively straightforward. You can simply enter your financial information on the entitledto.co.uk website for an instant assessment (it’s worth doing even if you don’t think you are likely to be offered any support as it’s free and can only result in increased income).

Budgeting loan

If you are in receipt of state benefits, or you are on a low income you may be entitled to some financial help in the form of an interest-free loan. This is for essential items which you are unable to afford in one lump sum (such as furniture or white goods) and is a great alternative to expensive loans, or the finance often offered with the product. You can borrow from £100 up to £812 at one time, and you can fill out the form here

Hardship payments

Some councils offer help for individuals who have undergone an ‘unforeseeable crisis or emergency’ (where you cannot afford to buy food, or need some help to stay in your own home), though the form in which this help is given differs greatly depending on where you live, and which scheme your council has set up (some offer cash, whilst others offer food grants). You can search for your own council here to find out whether such a scheme is available.

Reduce your outgoings

Search around for the best deal in regard to your gas/electric, broadband, insurances, mobile phone contracts etc. It could save you a considerable amount of money per month, which you can then use to pay off your debt, or at least ease your hardship whilst you pay it off.

Reduce or pause your credit card interest

If you have a good, long-standing relationship with your credit card provider, it may be worth asking them to pause the charging of interest for a period of time, so that you can pay off some of the balance. It certainly doesn’t always work, but is worth a try (one thing to note here, if the credit card issuer does agree to halt the interest, always ensure that this will not have a detrimental effect on your credit record).

Reject credit card interest increases

If you receive a letter from your credit card provider stating that the interest on your credit card will be increasing, you will have 60 days in which to reject the proposed increase. It may be the case that you won’t be able to use the card in the future, but you will be able to repay the balance at the older interest rate.

Ask your credit card issuer to write off your debt

This should only ever be attempted in extreme circumstances, and be aware that issuers will need proof of your situation, and proof that your financial situation is never going to improve, and even then they may never agree to your request. If your credit card issuer does agree to write off your debt in full, ask for this in writing to ensure that they will not pursue you in the future. Some creditors may require you to request this through an official debt advisor or case worker. If this is the case, please see the list at the bottom of this guide.

Strategies for optimising your repayments

It may sound obvious, but if you have any savings, it makes economic sense to pay off your credit card debt with them, as the interest on a credit card will always outweigh any interest you may be accumulating on savings.

It is the golden rule with credit card debt, that you should always pay more than the minimum payment on your credit card/s, as the majority of your payment will go mostly towards the interest, rather than the capital. The more you can afford, the quicker the debt is reduced and subsequently the less interest is added/paid every month.

Never miss a payment, as credit card default charges can quickly mount up and exacerbate any debt problems. Missing a payment will also have a negative effect on your credit rating, which could lead to other lenders tightening their policies toward you, and may result in less flexibility to manage your finances on your own terms.

Pay off the most expensive card first. If you have more than one card, check out the interest rates, and pay the highest one off first (whilst maintaining at least the minimum payments on the other card/s).

If you have a less than perfect credit rating, or you are unsure of what state your rating is in, check your credit report with one of the credit reference agencies, such as Experian, Equifax or Callcredit. Here you can check for any errors or anomalies on your credit report, and correct them by contacting the relevant creditor, or at the very least become aware of whether you will be likely to be accepted for a credit card or loan before you apply.

If you have a good credit rating, shop around for a 0% balance transfer card, to enable you to pay off your debt without accruing interest. There are many to choose from and they are offering increasingly longer periods and lower fees. It is, however, important to work out the cost of fees against the length of the 0% period, to ensure you are getting the best deal. Also if you are unsure whether you have a perfect credit score, you might want to pay extra attention to the ‘downsell’ proposition the issuer is offering. That is, the deal that the 49% who do not receive the representative product will receive, which could be markedly different to the headline rate that credit card issuers can promote. The golden rule with transferring your balance to such a card is to work out a regular payment plan to pay off your balance in full within the free period and do not use your card for purchases. Also, remember not to apply for too many cards at any one time, as this could leave a hard footprint on your credit report and have a negative impact on your credit rating.

If you need a longer period to pay back your credit card than you are being offered, consider a low rate card, where the rate will remain the same until you have paid off your credit card debt in full. Again, you need to do your sums first in ordered to ascertain how much you can afford to pay off and over what period this would be sustainable. It might also be worth considering a debt consolidation loan, where you transfer your credit card debt (and other debts too if applicable) to a loan. Loans can help because the interest on the credit cards ceases and you pay back a definitive sum over a definitive period, at the end of which you will be debt free. However, you do need to work out whether you can afford to commit to the repayments over the given period, as any missed payments can again harm your credit rating and make your debt problem worse.

If you own your own home, one option open to you is an equity release scheme. This is where you can release some of the capital from your home, and only repay it when you either die, or sell your home. Generally there are two types of scheme:

Home reversion schemes

With a home reversion scheme you effectively sell a percentage share of your property (for below market value price) to the provider, who then redeems his share when you either die or sell the property. So, for example, if you sold 40% of your home to the provider (albeit at a reduced price), the provider would be entitled to redeem a 40% share of the full market value when you sell the property or die.

Lifetime mortgages

With a lifetime mortgage you borrow against the value of your home, and interest is charged on the amount, rolling over every year, until you either die or sell the property.

Before undertaking an equity release scheme, professional advice should be sought, as the interest charged sometimes constitutes quite a considerable percentage of the value of your home, and may not be the most suitable scheme for you.


Alternatives to self-management of debt

If you can no longer cope with your debts, either financially or emotionally, or both, there are plenty of alternatives to managing your debt, with many organisations offering free debt advice and some who will manage your debt on your behalf.

Debt management plan

Debt Management Plans are informal arrangements made between you and your creditors to stop the interest on your credit card debt, and for you to pay a reduced amount of money on a regular basis, either for a set amount of time, until your debt is paid off, or until your financial situation improves. These plans are organised and generally negotiated through third party specialist companies, who work out a budget statement, based on all your bills and living expenses. An affordable amount of your disposable income is then paid by you to the third party, then onwards to all your creditors on a pro rata basis.

Whilst you are in a debt management plan, your creditors cannot pursue you for the debt and all the interest is frozen.

It is important to stress that you do not need to pay for a debt management plan. Some companies do charge a fee but many do not. Either choose an organisation from the list below, or research the company you have chosen to ensure that no fees are charged upfront, or added to your debt.

Those people living in Scotland can apply for a Debt Payment Programme (DPP) through the Debt Arrangement Scheme. For more details see www.dasscotland.gov.uk

It should be remembered that undergoing a Debt Management Plan (or a Debt Payment Programme in Scotland) may have a negative effect on your credit rating.

Administration order/composition order

An administration order is a legally binding agreement organised through your local county court. It is suitable for people who:

If your application is accepted, the interest on your debts will be frozen and your creditors will not be able to pursue you or take any further enforcement action against you for the duration of your Administration Order. After filling out an income and expenditure form, the court will decide how much you will need to pay towards your debts every month. This amount will then be divided between your creditors on a pro rata basis until your debt is paid off. If your debt will take too long to pay off at the amount you can afford, the court may decide to instead apply for a Composition Order, which is an agreement to pay a set amount each month for a definitive period of time (typically 3 years) with the rest of your debt being written off.

To apply for an Administration Order you will need to fill out form N92 from the gov.uk website http://hmctsformfinder.justice.gov.uk/HMCTS/GetForm.do?court_forms_id=651

If you feel that the debt will take too long to pay back at the amount you can afford each month, and you would like to be considered for a Composition Order, you should explain this on section C of this form.

There is no up-front fee to apply for either an Administration Order or a Composition Order, although the courts do take 10% of your payments as an administration fee, with the rest of the payments going to your creditors on a pro rata basis.

It should be remembered that undergoing an Administration Order or Composition Order may have a negative effect on your credit rating.

Debt relief order

A debt relief order is a cheaper form of bankruptcy, and is a formal arrangement organised through the courts. An arrangement is made where, for a specified amount of time (usually a year), you don’t have to pay anything to your creditors, and after the specified time, if your financial situation has not improved, your debts are written off. Debt Relief Orders are suitable for people who:

Not all debts can be included in a DRO – these include any magistrate’s court fines, child support payments or arrears, student loans, social fund loans, compensation for death or injury. The amount of these debts cannot be included in the £20,000 limit, and you are still liable for them after the Debt Relief Order has ended.

To apply for a Debt Relief Order, you must go through an ‘approved intermediary’ via ‘competent authorities’ who will apply on your behalf. For a list of such third parties, see gov.uk/government/publications/getting-a-debt-relief-order/

A debt relief order costs £90

It should be remembered that undergoing a Debt Relief Order may have a negative effect on your credit rating.

Individual voluntary arrangement (IVA)

An IVA is a formal arrangement with your creditors, where your debts are frozen and you agree to pay a regular sum of money for a period of usually 5-6 years to pay off all or part of your debts. Any remaining debt after this time is written off. 75% of creditors (by value) need to agree to the terms of the IVA in order for it to be processed.

An IVA is arranged by an Insolvency Practitioner

An IVA is a significant undertaking, in that if you do not keep up the repayments, the insolvency practitioner could apply to make you bankrupt. Also, if you own your own home, your creditors may demand that a charge is placed on your property, so that they receive their share of your debt when you sell your home. The full details of your IVA will be discussed with the Insolvency Practitioner, so it is important to ensure you are aware of the ramifications of such an undertaking.

IVAs have quite substantial start-up administration fees, and ongoing fees for the entire period the IVA is running. It is important therefore to check what fees you will be paying and how this will affect your repayments.

The ramifications of an IVA on your credit rating are similar to that of bankruptcy, in that it will remain on your file for 6 years and you may find it difficult to receive credit during that time, or you may pay higher interest rates for borrowing.

To search for an insolvency practitioner in your area, see gov.uk/insolvency-service

It should be remembered that undergoing an IVA may have a negative effect on your credit rating.

Bankruptcy (in Scotland ‘Sequestration’)

Bankruptcy is a legal procedure for people whose unsecured debts outweigh their assets, including any property and vehicles, and who have no hope of paying off their debts within a reasonable time. If you are successful in your bankruptcy application, all your ‘permissible’ debts are written off, and in most cases after 12 months you are released from your bankruptcy.

It should be noted that not all debts can be included in your bankruptcy, and therefore will not be written off when your bankruptcy period is over. These include:

To apply for bankruptcy, you must apply online and there is a cost of £680.

If you are having trouble filling out the forms, or would simply like some advice, the Insolvency Service runs a helpline, 0300 678 0015, which is open from Monday-Friday 9am-5pm. If you would prefer some face-to-face help with the bankruptcy forms, contact your local Citizen’s Advice Bureau.

Fees:
As of November 2017, the fees for bankruptcy stand at £680 (this includes an adjudicator fee of £130 and a deposit of £550). This fee must be paid when you apply for your bankruptcy online.

If you cannot afford the bankruptcy fees, there are some charitable organisations who may be able to help towards this. Search through the database: Turn2us.org.uk/Find-Benefits-Grants

Once the bankruptcy online forms and fees have been submitted, your case will be judged on its merits. It may be that an official will contact you within a couple of days(usually by phone) to discuss your case further.

At this stage you will either be assigned an Official Receiver (if you have no assets), or an Insolvency Practitioner (who will be responsible for selling your assets), and they will consider whether, without paying towards your debts, you can afford to pay any monies to your creditors. If it is decided that you do indeed have sufficient disposable income, it could be decided that you undertake an ‘Income Payment Order’ (IPO). This will be a set amount that must be paid every month, usually for a period of 3 years. An IPO is a court order, and as such, if you do not keep up the repayments, the Official Receiver may apply to the court ordering a suspension of your discharge from bankruptcy, or they may demand that monies are taken directly from your wages.

During your bankruptcy period (which usually lasts for around one year) you will have to follow ‘bankruptcy restrictions’, which means that you cannot:

If you are found to be undertaking any one of the above during your bankruptcy period, or indeed being dishonest about your finances in any way, your Official Receiver/Insolvency Practitioner can request that you undertake a Bankruptcy Restriction Undertaking (BRU), where you will have restrictions in place for a period of time exceeding your nominal 12 months, which could be as long as 15 years. If you refuse to comply with this request, your Official Receiver/Insolvency Practitioner could explain his reasons to the court, and they may enforce a Bankruptcy Restriction Order, which are the same restriction as a BRO, but with the legal weight of a court in order to enforce it.


Free debt advice:

Organisation

Description

Contact

Stepchange A free charitable organisation offering debt advice and a full debt management service (including debt management plans)

0800 138 1111

www.stepchange.org

Citizens Advice

A free money advice service offering debt advice and a full debt management service

03444 111 444 - England
0800 028 1881 - NI
0808 800 9060 - Scotland
03444 772 020 - Wales

citizensadvice.org.uk

Debt Support Trust

A charitable organisation offering free debt advice

0800 085 0226

debtsupporttrust.org.uk

National Debtline Offering free online debt advice

0808 808 4000

nationaldebtline.org

My Money Steps Developed by National Debtline, this service offers 24/7 online debt advice

mymoneysteps.org

Debt Advice Foundation A charitable organisation that offers online and telephone help and advice

0800 043 40 50

debtadvicefoundation.org

Payplan Offers free advice and a full debt management service (including debt management plans). No hidden fees. This company also deals with IVAs

0800 280 2816
0207 760 8980 (mob)

payplan.com

Money Advice Service This organisation has been set up by government to help with debt problems. There is both a telephone number and a web-chat service available. There is also a debt advice locator, which helps you search for a debt advice service near you.

0300 500 5000

moneyadviceservice.org.uk