Government debt consolidation and debt solutions

Can the government write off my debt?

Insolvency is a government-backed way to write off debt. But not all types of debt can be included. Whether it is the right option for you depends on your individual circumstances and eligibility.

Insolvency is legally binding and only available after other debt solutions have been ruled out. It stays on your credit report for six years and can seriously affect your ability to get credit in the future.

The following insolvency options are available in England:

• Bankruptcy
• Debt Relief Order (DRO)
• Individual Voluntary Arrangement (IVA)

Bankruptcy

Bankruptcy writes off debts that you cannot afford to repay. It is often seen as the last resort when all other debt consolidation and management options have been exhausted. If you have an asset like a house or car, it may be sold to release funds to pay your debts.

It costs £680 to apply for bankruptcy. If you can’t afford to pay this upfront, you may be able to access a payment plan, grant, or charity contribution. But you will need to pay the whole amount before you can submit your application.

Bankruptcy lasts for 12 months, after which time you’ll usually be discharged. This means you’ll be released from the debts that were included, and restrictions will end.

Declaring bankruptcy is a serious financial decision. The process can involve a loss of your financial assets, the closure of your bank accounts, and restrictions on owning a business until your bankruptcy is discharged. Your bankrupt status will appear on your credit report for six years, and you may find it difficult to get credit during this time. 

Debt Relief Order (DRO)

Debt Relief Orders allow you to suspend debt repayments for a fixed period (usually 12 months). When this period comes to an end, the debts with the DRO will normally be written off. No fees apply.

Like bankruptcy, a DRO will stay on your credit report for six years. And it can affect your ability to get credit in the future.

To be eligible, you must have a low amount of debt and not own any valuable assets, like a house. You won’t be eligible if you’re currently bankrupt, have an interim order, or an IVA.

To apply for a DRO, you will need to contact an approved debt adviser who can make the application on your behalf.

DRO eligibility requirements apply:

• Your total debt must not exceed £50,000
• You mustn't have enough spare money at the end of the month to make your debt repayments
• You can’t have any savings or assets worth more than £2,000 in total, or a vehicle worth more than £4,000
• You can’t apply for a DRO if you’ve had one in the past six years

During the DRO period, restrictions will apply. The DRO can end if your situation changes or your income increases. Certain types of debt, such as student loans, child maintenance payments, court fines, and any new loans cannot be included.

Individual Voluntary Arrangement (IVA)

An IVA is a legally binding arrangement with your creditors to repay some or all of your debt. You make monthly payments to the insolvency practitioner dealing with your case, who will split the money between your creditors. Fees will apply for this service.

IVAs normally last for five or six years. And if agreed upon by your creditors, any remaining balance will be written off at the end.

You might be eligible for an IVA if you have more than one creditor and a regular source of income.

To apply for an IVA:  

• Appoint an insolvency practitioner who will deal with your creditors on your behalf
• They will work out how much you can afford to pay and how long the IVA should last (usually five to six years)
• An IVA proposal will be submitted to your creditors
• The creditors holding 75% of your total debt will have to agree to the proposal before the IVA can start

Note that an IVA will stay on your credit file for six years from the date it starts. This will affect your credit score and may reduce your chances of getting approved for finance.

Can I get free debt advice?

Yes, the government offers free debt advice through MoneyHelper. You could also get free, expert advice from Money Wellness, Citizens Advice, National Debtline and StepChange. We also suggest that you get in touch with your lenders to see if there is anything they can do to help.

Is there a government scheme to help with debt?

Yes, Breathing Space (also known as the Debt Respite Scheme) is a free government programme that can freeze interest and charges for 60 days. It can also prevent your creditors from contacting you or taking enforcement action during this time. If you are receiving treatment for a mental health crisis, you will be protected for the duration of your treatment, plus another 30 days.

You will still need to make debt repayments, but you can use this temporary respite to find a suitable debt solution.

To apply for the scheme, you will need to contact a debt adviser (for free) online, over the phone, or face-to-face. Or, if you are receiving mental health treatment, someone else could contact them on your behalf.

What is a debt management plan?

A debt management plan (DMP) is an informal agreement between you and your creditors for repaying unsecured debts like credit cards and personal loans. You make one fixed monthly payment to a DMP provider, who splits the money between your creditors. Fees may apply, depending on the company you use.

Unlike an IVA:

• a DMP isn’t a form of insolvency or legally binding,
• the length of a DMP solely depends on how much debt you have and can afford to repay each month,
• you need to pay the whole amount back by the end of the plan. 

The informal nature of these agreements means that your creditors can still contact you. But if they are contacting you more than they should, you can ask your DMP provider to try and negotiate with them.

Entering a DMP and paying less than the minimum monthly repayment may harm your credit score. This could affect your ability to get credit in the future. Note that your DMP could be cancelled if you break the terms and conditions, by failing to keep up with payments for example.

Can I get free debt consolidation?

You may be able to get a ‘free’ debt consolidation loan where there are no charges to set it up. But interest will still apply, and if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total. Early repayment charges may apply if you clear the loan before the end date, depending on the terms and conditions.