Many people in the UK struggle with debt. If you’re looking for help, make sure you choose a debt advice service that’s right for you and your personal circumstances.
Understanding a debt crisis
A debt crisis is when you can't make your basic payments, such as your mortgage or rent, and energy bills. If you’re managing to make payments but your total debt is more than you earn in a year (after tax), this could indicate a debt crisis.
If your debt is well managed but you’d like help to reduce it you’re not in debt crisis, but you can still get advice.
Being clear about your situation will help you work out the best way to proceed.
Should I take out a loan?
Taking out a loan to pay off your debts can be slightly counter-intuitive. Generally, if you can avoid it then you should.
There are circumstances where this might be an appropriate option. If you’d end up paying less interest, then it could be something to consider. If you opted for a secured loan, which is secured against your property then its likely that some loans have variable interest rates, meaning your repayments could increase.
If you’re looking into a loan, then make sure what you repay will go towards paying off the debt, rather than racking up more fees in interest. This will only make your debt problems worse and cause you more stress.
Can I get a payment holiday?
If you need some short-term help, you can see if you're eligible for a payment holiday or an interest freeze. Although your lender is not obliged to do this, the government has indicated that they should be willing to help due to the pandemic. If you can prove you’re in temporary financial difficulty, it’s in their interest to help you manage the debt.
Is a debt-management plan right for me?
If you’re managing to pay your priority-debts (I.e. your mortgage), but need help with your non-priority debts (I.e. credit card bills), a debt management plan might be for you. You can pay for a debt-management plan, but you don’t have to. Some companies, such as StepChange, offer them for free. However, it’s important to know that these plans will show up on your credit file for six years.
Debt relief orders (DRO) - for debt under £20,000
If you have less than £50 spare each month, and aren’t able to pay your debts then you could get a DRO - for some debts. You won’t qualify for a DRO if you own your home or have assets over £1,000. They work by freezing qualifying debts for a period, often twelve months. The advice is free, but it’ll cost £90 if you decide to go ahead (you can pay the £90 over a few months but the order won’t start until it’s paid).
Again, you should be aware that DROs stay on your credit file for six years and will affect your ability to get credit in the future. They’re also registered on the public bankruptcy and insolvency register.
Speak to a credit counsellor to see if a DRO is the best solution for you.
Should I consider an IVA?
For debt over £20,000 you may have heard of IVAs - Individual Voluntary Arrangements. Often the last resort before bankruptcy, an IVA is a formal agreement with your creditors and usually lasts for five years. You can’t arrange an IVA directly, you must use an Insolvency Practitioner. Your creditors are asked to accept fixed monthly payments for the term of the IVA. After the IVA has ended the remaining debt is written off. Charges can be high and are included in your monthly payments. The IVA stays on your credit file for six years. If you don’t keep up the payments, you might be made bankrupt.
IVAs are only available in England, Northern Ireland, and Wales. If you’re in Scotland, you’ll need to look at a Protected Trust Deed.
Where to go for free and impartial help
If you’re not sure what is the best solution for your circumstances, there are several organisations you can speak to free of charge:
Offering online guidance for debt issues and help with letters to creditors.
You can chat online with someone, call their free helpline, or get a customised debt solution plan in fifteen minutes.
This charity offers free online advice, a free helpline, and an assessment tool to help you understand your situation better.
Offering online or free telephone debt advice, they’ll help you work out which solution best fits your needs.
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