If you’re struggling with mounting debt and are based in England or Wales, there are several options available to help manage your payments or even wipe your debt completely. Your situation will dictate what option is best for you, with the amount you owe and conditions like your income and assets having impact on what path to take. The first thing to do is speak to a professional debt advisor, which is available for free, who will be able to provide judgment-free advice on the best route forward.
Debt Management Plan (DMP)
A debt management plan is one of the most common options for people with debt repayments that they can no longer keep up with. Debt management plans (DMPs) are made for those with non-priority debts, such as store cards, personal loans, and credit cards, and work through a DMP provider who negotiates with your creditors to come up with a payment plan you can afford. You then make one consolidated payment to your DMP provider, who pays your various debts over an arranged amount of time.
Debt management plans are only suitable for non-priority loans, including bank loans, overdrafts, credit or store card debt, and money borrowed from family or friends. You can’t use a debt management plan to pay off priority debts like council tax, court fines, or electricity and gas bills, and will need to seek out an alternative option if this is the case for you. To find out if a debt management plan is right for you, contact a debt advice organization and speak to one of their specialists, making sure that all of your payments go toward paying off your debts.
Debt Relief Order (DRO)
A debt relief order is made for more severe debt cases and can only be used if you fit into a specific number of criteria, mainly looking at your assets and income level. If you have low income and very few investments that may be used to pay off your debt, you may be able to have your payment frozen for a year and potentially written off after this time if your conditions haven’t improved. An agreement to a debt relief order is only likely to be arranged if it’s unlikely that you’ll ever pay your debt due to your circumstances.
To apply for a debt relief order, you must have debts of less than £20,000, while not owning any assets that have a value of over £1,000 and have saved less than £1,000. Also, you must have less than £50 each month after paying all your monthly household bills. You won’t be able to apply for a debt relief order if you’ve applied for bankruptcy, or if your debt holders have applied to make you bankrupt.
If you can apply for a debt relief order, then there are several debts you can have frozen, which are called qualifying debts. These include a mixture of priority and non-priority loans such as overdraft, credit cards, rent, utility bills, and income tax, but don’t have a few specialty debts, such as student loans, court fines, and social fund loans. Start by contacting a debt advice company and have your situation assessed by a professional and who will put your debt relief order in place if applicable. This will cost £90, which can be paid in smaller amounts over six months if needed, and only when you’ve paid will the debt relief order take effect.
Individual Voluntary Arrangement (IVA)
An individual voluntary arrangement is a scheme that allows you to take multiple sources of debt, consolidate them into a single loan, and then pay this off over a set period at a lower monthly amount, and then any remaining debt is cleared. You can apply for an individual voluntary arrangement if you have enough income to pay off some of your debts, but not the monthly amounts that your creditors are asking for. To reach an agreement, you’ll need to show that you have enough income to cover your repayments over a five- or six-year period or have enough savings to pay a lump sum. An insolvency practitioner such as Jubilee 2000 UK will need to be contacted to create your voluntary arrangement proposal, which will be sent to your creditors, who must agree to the terms set out. If they agree, you’ll sign a legally binding contract, meaning that you have to stick to the payments laid out in the proposal.
An individual voluntary agreement can pay off several debts and loans, including overdrafts, mortgages, credit cards, and catalog debt. Still, it can’t be used to pay off your student loan or court fines. Always check with your debt advisor what debts will be included in your IVA and not. An IVA will consist of a monthly fee paid to your insolvency practitioner for arranging the agreement, which will be rolled into your monthly payments, so always take this into account.
Bankruptcy is where all your debts are written off or paid with any money or assets you have, allowing you to make a fresh start. Applying for bankruptcy is a significant process, and you’ll have to show all information relating to your debts, outgoings, income, and letters from your creditors to start the process. Your application will go to a professional from an insolvency service who will make the decision.
Once you’ve been declared bankrupt, your income and assets will be reviewed to see the best way to pay off your debts. The assessment may include an interview, and your creditors will have to claim any money that they are owed, with any assets and savings that you’ve used to pay off your loans. After a set period, commonly a year, your debts are written off, allowing you to make a new start. In this bankruptcy period, there will be restrictions placed on you, meaning you can’t apply for credit for over £500 without telling the lender that you’re currently bankrupt, so they can make the decision to lend to you or not. Bankruptcy will appear on your credit rating for at least six years and will impact your ability to borrow any significant amounts of money.