If you live in England, Wales or Northern Ireland and are trying to deal with your personal debt, it is worth considering the various remedies that may be available to you.
There are at least seven distinctly different debt solutions and you should investigate which of these most closely matches your circumstances, taking advice from a professional debt advisor or from one of the so-called charity organizations which also offer advice. In Scotland, the legislation is somewhat different to the rest of the UK. Let’s look at each of the top seven choices of personal debt solution.
Talk to your Creditors
It is never a bad idea to talk directly to the people who lent you money in the first place and to let them know of the financial difficulties you are experiencing. They may be able to advise you on the best course of action to take. The end result may be that you reach negotiated agreements with your creditors for repayment of some or all of your debts. This is sometimes called a self administered debt management plan where you do all the negotiations with your creditors yourself without the assistance of a third party. You could find that your creditors are willing to freeze or suspend interest and penalties and accept reduced payments on your debts and they may be willing to increase the time they will allow you to repay your debts in full. They may allow a payment break for a limited period to allow you time to get your finances in order again and that may be all you need to get back on your feet again.
Debt Consolidation
Debt consolidation is where you negotiate a new loan which is sufficiently large to enable you to pay off all of your debts at once, leaving you with just one loan repayment to make every month. Typically, the term of such a loan can be very long and the interest rate may be high but the monthly payment may be less than the total of the monthly repayments you are making on your current borrowings. There are some downsides to consolidating your debts in this way. Your new lender, for example, may insist on securing the consolidation loan against any property you may have by taking out a charge against that property. Before taking out a consolidation loan, you need to be satisfied that you will be able to make the repayments for the agreed duration of the loan and that you can do without taking out more credit unless your financial circumstances improve sufficiently to warrant such action.
Debt Management Plan
A debt management plan is much the same as the self administered debt management plan described above, except that you engage the services of a debt management company to negotiate with your creditors on your behalf and to manage your payments to them. The third party you engage will of course charge a fee for their services so it will take longer for you to repay their your debts in full. The benefit is that you can avail of the experience and expertise of the debt management company in seeking to negotiate freezing interest and penalties and you can avoid the hassle of ongoing contact with your creditors. One downside of a debt management plan is that it can last quite a long time and there is no guarantee that all of your creditors will continue to keep interest and penalties suspended or frozen for the full duration of the plan.
County Court Administration Order
Provided your debts total no more than £5,000 and are owed to at least two creditors and provided that you have a court judgment entered against you by one of those creditors that you cannot pay in full, you can ask the court to make a County Court Administration Order. Under such an order you make weekly, monthly or quarterly payments to the court, which shares the funds among your creditors in proportion to the amounts you owe them.
IVA
If you are insolvent and have regular income or assets or both, you can engage the services of an insolvency practitioner to prepare, negotiate and administer an arrangement for you to voluntarily repay your creditors some or occasionally all of the monies you owe them. Such an arrangement is called an Individual Voluntary Arrangement or IVA and it will typically last five years, after which time you will be debt free. Over the last few years, IVAs have become more popular than bankruptcies.
Debt Relief Order
England and Wales DRO
If your income is low and you have assets of no more than £1,000 and your debts do not exceed £20,000 in total, you can, without going to court, on payment of a fee of £90, apply for a Debt Relief Order and if granted, your debts will be cleared in twelve months, without your having to make any further payments, unless your circumstances change significantly in the meantime.
Northern Ireland DRO
If your income is low and you have assets of no more than £300 and your debts do not exceed £15,000 in total, you can, without going to court, on payment of a fee of £90, apply for a Debt Relief Order and if granted, your debts will be cleared in twelve months, without your having to make any further payments, unless your circumstances change significantly in the meantime.
Bankruptcy
Bankruptcy is sometimes described as a last resort for people with financial problems who find themselves insolvent. If none of the six solutions above are suitable for your circumstances, then this seventh option may appeal to you. Bankruptcy can be initiated by you or indeed by one of your creditors to whom you owe at least £750. Your assets are sold and you may also have to make payments from your surplus income for up to three years, to help clear your debts.
Debt Solutions summary
Each of these solutions has some merit but they differ very much from each other. The best option for you will depend on your own personal preference, your current and likely future circumstances and those of your family. The amount you owe, your income and your assets will also have a major bearing on which options are available to you. To help you decide, you should speak to a debt advisor about your situation. We have many advisors who can provide information on the pros and cons of each solution and how each solution compares and contrasts with the other.