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What Should Be The First Thing to do When My Debt is Unmanageable?
If you have debts of over £5000, you may be able to write off your debt with an IVA

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We all know that money doesn’t grow on trees, but the range of credit cards, pay monthly financing agreements, and payday loans make it seem like it does! It’s so easy to fund expensive purchases, and people use credit to help them finance their cars, home, and other items.

However, paying off your loans can be more complicated than securing them in the first place. It’s no secret that plenty of people in the UK are battling debts, and it’s a more common problem than many would believe.

According to statistics published by Cyber Crew, 65% of people in the UK have personal debt, and the average loan equates to around £31,000. Half of the people living in large towns have debt, and the Covid-19 situation worsened matters.

Despite these statistics, most people feel ashamed about their debt and deal with the issues alone.

We’ve put together this helpful guide, so you can evaluate your debt and know which steps to take if it’s unmanageable.

Knowing the Difference Between Debt and Money Management Problems

If you’re struggling with money, the first thing you need to do is look at your monthly income and work out how much you have. Severe debt is classed as an inability to meet your obligations to pay your creditors and have enough to live on.

Money management problems occur when you have a sufficient income to pay off your debts and live but spend too much money on non-essential items. For many people, poor money management often leads them to believe they’re in debt, but a few simple changes can make a big difference.

Budget Planning

Budget planning can save you a lot of time and hassle because it enables you to track your incomings and outgoings to make sense of where you’re spending the most money. You can find plenty of helpful budget calculators online, but we think the HSBC calculator is the most useful.

Gather all of your bills, credit card statements and don’t forget to look at your TV subscriptions. Once you subtract your monthly repayment obligations and living costs, you’ll be left with your disposable income.

From there, you can look at your essential expenses and see how much money you’d be left with if you cut down on subscriptions, takeaways and any other unnecessary costs.

Money management can be complex for most people, but it’s essential to understand the difference between being in debt and failing to budget properly.

If your income doesn’t provide you with enough for your essential living costs and repaying your debt, then you’ll need to look at which debt solutions could help to get you back on track.

Things to Do If You Can’t Repay Loans and Credit Card Debts

It’s easy to put purchases on your credit card, but you’ll incur interest if you can’t pay the debt off. When it gets to a point where your minimum monthly payment is too much, you should immediately seek some debt advice.

Ideally, it would be best to reach an agreement with your creditors and reduce your monthly payment to a more manageable amount. Most creditors will be willing to accept a smaller payment amount because it shows you want to meet your obligations, and it saves them from going through court.

The last thing you should do is take out another loan to pay off your other debts. Some loan companies offer people with bad credit a loan, but the interest rates are excessive, and it can cause more problems in the long term.

Seek Free Debt Advice

Whether it’s credit card debt, loan repayments or you’re behind on your mortgage; there are plenty of ways to evaluate your finances and become debt-free. The Citizens Advice Bureau and Stepchange Debt Charity are excellent sources of information, but you might find an independent debt adviser more helpful if you need to secure an effective debt management plan.

It can be useful to speak to free debt charities so you know your options, but it’s best to let a specialist help you reach an agreement with your creditors.

What Options Are Available to Become Debt Free?

There are many options available, and you should address your debts before they get out of hand. A debt management plan often enables you to have some breathing space, and your creditors will leave you alone – but there are some restrictions you should be aware of.

Here are the most common options:

Filing For Bankruptcy

While bankruptcy is often regarded as an easy way out of debt, there are many negative points you need to consider. Firstly, going bankrupt costs about £680, so you need to make sure you can afford to file.

If your unsecured debts total more than the items you own, you can file for bankruptcy, and there’s no minimum debt amount. Going bankrupt might be the best option for people with little or no equity and a lack of valuable belongings, but it’s not suitable for everyone.

You shouldn’t file for bankruptcy if:

  • You’d like to keep your debt problems private

  • The amount you owe is less than £20,000

  • You’re an accountant, estate agent or solicitor.

Bankruptcy can negatively impact your credit score, and it will stay on your file for six years. You’ll also struggle to secure a mortgage, be unable to work in the legal, accounting and finance industries, and you might have to sell your home to pay back your creditors.

People with a Bankruptcy Restrictions Order can’t apply for anything over £500 in credit, and if you do this, you’ll face legal implications.

Administration Order

If you owe £5000 or under, you might be able to secure an administration order from the court. It enables you to pay off your debts without dealing with creditors, and all parties enter into a legally binding agreement.

People with debts over £5000 and no surplus income aren’t eligible to secure an administration order. You can also only apply for one if you have two or more creditors, so while this debt relief solution can be beneficial, you might need to explore other avenues.

Debt Relief Order

If you owe £20,000 or less and can only afford to pay £50 a month to your creditors, a debt relief order can free you of debt. A debt advice foundation can help you fill in the application, and your creditors can’t expect you to pay any money back.

Unless your financial situation improves, the debt relief order will last for one year. At the end of that year, your debts will be written off if you still can’t afford to pay.

Most debts are included in your relief order, except:

  • Child Support and Spousal Maintenance

  • Magistrate Court Fines

  • Social Loans

  • Student Loans

Debt relief orders are beneficial if your financial situation won’t improve, but if you can avoid writing your debts off, you should.

While writing off your debts might seem like the best solution, it can impact your employment opportunities, and the order stays on your credit file for a minimum of six years. It can also affect your credit rating and make it difficult to start your own business.

People that own a home aren’t eligible for debt relief orders either, regardless of whether their home has equity.

Individual Voluntary Arrangement (IVA)

An Individual Voluntary Arrangement is a way to pay back your debts without your creditors hassling you. It’s a legally binding agreement between all parties, which allows you to make an affordable monthly payment, and your interest is frozen for the duration of the IVA.

During this time, you’ll be able to have peace of mind that your creditors will leave you alone, and while an IVA can impact your credit score, once six years pass, your file is wiped clean, and you can focus on building a new credit score.

One issue with IVA’s is that just because one creditor agrees to the payment plan doesn’t mean your other creditors will. The support of an insolvency practitioner can make it easier to secure an arrangement, and most creditors will be willing to agree to the plan – especially if it means they get their money back.

As long as you make your monthly payments, you’ll be able to free yourself of debt and work on improving your financial situation in the future. Failure to meet your monthly minimum payment enables your insolvency practitioner and creditors to request a termination of the agreement.

In this event, you’ll need to find another debt solution – which can be a challenge.

Speak to The Debt Advice Specialists

Hopefully, this guide has cleared up any ambiguity about the different types of debt relief options available. You now have the information you need to decide which is best for your circumstances.

Unsecured debt can cause anxiety, stress and mental health conditions, but we’re here to help. Our specialist financial advisors work with lots of people, helping them too secure their personal debts and find the light at the end of a dark tunnel.

Please feel free to get in touch with us today.