When employment struggles and low wages can’t keep up with the cost of living, it is easy to get into the habit of borrowing and fall into debt. Many people end up in debt and try to hide it. This is not the best way to get your debt under control. This guide will explain what to do when you are in debt.
When to Seek Help With Debt
Sometimes when people are in debt, they do not want to admit it to others or even themselves. You might not want to acknowledge that your debt is a problem. The longer you go on like that, the worse the problem will become. Debt can cause an immense amount of stress, which can take its toll on your health. The stress of worsening debts can have negative effects on mental, emotional, and physical wellbeing. You may be in denial about debt if you struggle to pay for basic living costs and rely on credit cards. If you cannot keep track of all your debts, then it is time to seek help for coping with debt.
How to Start Managing Debt
If your circumstances are severe, it can be difficult to know where to start when confronting your debt. First of all, you need to calculate how much money you owe in total and who you owe it to. Then you need to calculate your monthly income and outgoings so that you can budget with what you have. If your income cannot cover your bills and living costs plus the basic minimum repayment amount each month, then you need to speak to your creditors. The lenders may allow you to make an arrangement for a more affordable repayment plan, or temporarily freeze the interest on your debt.
When you are working out how much money you have and how much you owe, it is important to prioritize what you pay for. There are some things which you will need to keep on top of to avoid serious legal consequences:
- Rent or mortgage
- Energy bills
- TV Licence
- Council Tax
- Income Tax and National Insurance
- Hire purchase agreements (e.g. TV or kitchen appliance)
You need to be able to cover these priority debts from your income. Then you can look at your less immediately pressing debts. These debts include:
- Credit card debt
- Store card debt
- Money borrowed from friends or family
You will have repayment plans in place to repay these debts over time, so you can afford to leave them a bit longer as you try to get yourself into a stable financial position. Work out the minimum repayment for each debt per month and consider the interest rate. Pay off small chunks of the larger debts first to reduce them. If you are having trouble covering your payments then you need to manage your income. Draw up a monthly budget for your living costs, and try selling unnecessary items for a bit of extra money. You should also consider switching lenders or cancelling credit cards if you can.
Severe Debt Management Solutions
You might find yourself struggling to make ends meet and make any of the repayments at all. If you are in severe debt, there are several solutions for debt management that you may be able to make use of. You should ask for guidance from a debt adviser before pursuing any of the following options.
Debt Consolidation Loan
Having a lot of smaller debts increases your overall debt because of the individual interest rates. You may be able to consolidate all of your loans into one, which would make it easier to deal with creditors and manage repayments. You should only do this if you know that you will be able to afford the repayments, or you could end up getting into further debt. It might take you much longer to pay off the debt, even with lower interest.
Debt Management Plan
You should try to arrange a debt management plan with your lenders. This is an agreement to repay in monthly instalments. You may be able to have the interest and additional fees frozen. It is only an informal negotiation, but it can help you to get out of arrears and manage monthly repayments. The creditors may still be able to request that you pay the debt in full later, or take action against you to recover the money, unless you cover this in the agreement. They could also cancel the DMP if you fail to make repayments.
You may be able to apply for an Administration Order if your debts total less than £5,000. Under an Administration Order, you make monthly payments to the court and they will make arrangements with your creditors. The court does take 10% of the payments for a handling fee. Your lenders cannot take legal action against you while you have an Administration Order. However, you must meet the eligibility criteria to be able to get an AO. These include owing at least two separate creditors and having a court judgement to pay.
Individual Voluntary Arrangement
An IVA is a formal agreement between you and your creditors, set up by a third-party professional. Through the arrangement, you will pay off some of the total debt, but they will consider it settled after five years. You must make monthly payments to the insolvency practitioner and they will split them between your creditors. An IVA is a type of insolvency but is different from bankruptcy. You will be on the public Individual Insolvency Register until three months after the IVA ends. Be aware that an IVA could cost a lot.
Debt Relief Order
When you are on a low income with less than £20,000 in debt, then you may be able to apply for a Debt Relief Order. If your debt is relatively low and you have few assets, then your debt could be written off without the severity of bankruptcy. Your credit file will show a record of the DRO for six years. This can affect your credit rating and notify potential lenders that you struggled with repaying debts. During a DRO you will be under certain restrictions for 12 months, and you will still have to repay certain debts, like student loans.
You can apply for a court order to start over if your debts are overwhelming. You won’t have to deal with the creditors if you do this. However, it is a big risk because you could end up losing your home and having to sell valuable assets. The legal status of bankruptcy will usually last for a year, at the end of which your debts should mostly be cancelled. Bankruptcy will affect your credit history for a further six years. It is a last resort and not taken lightly.
How to Deal With Debt Collectors
Creditors can take legal action against you if you fail to make payments and do not attempt to make arrangements to pay off arrears in instalments. You may feel pressured if they are constantly contacting you or questioning your finances. They might even send bailiffs to your home if they have acquired a court order to do so. If this happens, do not open your door or let them in. If they do not have a warrant, then they cannot enter and seize belongings to repossess them. They should offer an arrangement for payment beforehand.
Where to Get Free Debt Advice
Professional debt advisers are the best option to help you make sense of your finances if you are tangled in debt. They can give impartial guidance and assist you in finding the most appropriate solution for debt resolution. An independent adviser can help you to put things in perspective and make your debt feel less overwhelming. If you do not know how to prioritize your debts or budget realistically, they can help you to figure this out, and also contact creditors on your behalf. There are lots of charities which can help you for free, including by telephone or face-to-face appointments, or even home visits. Sadly, there are some agencies which aim to take money from you instead of just helping with your debts. Always check if there is a charge before using debt advice services. Here are some of the resources available: