Imagine that you wake up one morning and someone tells you that every single one of your debts has been written off. That crushing feeling lifts from your chest, and you no longer go through your life with a constant sense of dread. You’re free!
If you’re struggling with debt, I can promise that you’re not alone. In the UK, the average amount of debt per adult is over £30,000. The UK’s total interest payments on personal debt is estimated to be £45,431 million over the course of a year.
Debt has a way of making us feel isolated, ashamed and trapped. We often despair, and assume that life is always going to involve being chased for money that we can never pay. Creditors and debt collectors often rely on you to feel this way, in the hopes that it will pressure you to pay up.
However, there are a wide range of government approved schemes for you to deal with your debt, and get it written off either in part or in whole. It can be tempting to ignore the debt, but this won’t stop creditors contacting you, and possibly trying to take you to court. It never has to get to this stage (although, if it does, there are still many things you can do to manage and write off your debts). Let’s look at all the options you have for dealing with debt.
What are the best ways to deal with debt?
The best ways to deal with debt are to get it wholly or partly written off through an Individual Voluntary Arrangement (IVA), a Debt Relief Order (DRO), or by agreeing to a debt repayment plan that allows you to make reduced and manageable payments.
You could also declare bankruptcy, although this is not a decision to be taken lightly, as it will cause significant changes to your life and assets.
We’ll look at each of these options in detail, and consider their pros and cons, so you can discover the best solution for you. Always check the Financial Services register to see if if a debt organisation is government authorised.
Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement (IVA) is a government approved debt help scheme, which helps you if you’re struggling to repay your debts. An IVA is a formal agreement made between you and the people who you owe money to, and it is managed by an Insolvency Practitioner (IP).
An IVA allows you to pay back a small percentage of your total debt, and get the rest of it written off. At the end of the IVA (which runs for 5-6 years), no matter how much money you have left to pay back, the debt gets cleared. You will make small, monthly payments towards your debt, based on what you can afford. You should always be able to meet your essential household needs (electricity, warmth and food), so your Insolvency Practitioner will work with you to decide a budget, and a reasonable amount for the monthly repayment, based on what you can afford. IVA Advice offers free, qualified advice on whether you are eligible for an IVA, and how to get started on one.
The main advantages of an IVA is that it clears your debt for good after five years, while allowing you to keep key assets such as your home and car. It also stops your creditors from contacting you, putting an end to stressful and debilitating communication. Your creditors will no longer be allowed to contact you, and must communicate with you via your Insolvency Practitioner. However, getting an IVA does affect your credit rating for the duration that you have it. Have a look at our IVA pros and cons lists below, to help you decide if an IVA is right for you.
- Ends your debt for good (writes off debt after 5 years)
- Affordable repayments
- Stops your creditors from adding interest to your debt
- Prevents any legal action
- No more stressful contact with creditors
- Protects important assets like your home and car – unlike DROs and bankruptcy
- Protects your reputation, job and privacy
- Impacts your credit rating for the duration of the IVA
- Windfall clause – you’ll have to declare and contribute any financial gifts you receive towards your debt
- Banking restrictions – an IVA prevents you from getting a bank account with an overdraft, or a credit card
Debt relief Order (DRO)
If you owe less than £20,000 in total and you have very little spare cash and no valuable assets (such as your own house) you could get a Debt Relief Order. This is a personal insolvency process which gives you legal protection from your creditors, and writes off your debts after one year.
- Your creditors will no longer be able to take legal action against you, stopping all stressful calls and letters
- Offers quick escape from debt – once you enter a DRO, all debt it covers is written off after one year.
- You must have less than £50 disposable income to be considered, and you can’t own your own home.
- Affects your credit rating for a period of six years, and will impact future credit applications.
- DROs only cover specific debts, so you may still be liable for certain debts, such as criminal fines or Child Maintenance Arrears, even after you take out a DRO.
Debt Management Plan (DMP)
A Debt Management Plan (DMP) is a really useful way of dealing with debt. A DMP either through a charity or a debt management company, allows you make reduced payments based on what you can afford, and freezes the interest on your debts. This stops you having to pay increasing interest on your debts, opening up the path to freedom from debt.
You’ll get a debt adviser who will look at your essential expenses, and calculate what you can actually afford to repay to your creditors. Your adviser will deal with your creditors on your behalf, stopping all stressful communications with you.
Debt Management Plans prove that you have taken action on your debt, and are a much better solution than continuing to ignore debt and creditors, which may eventually lead to court action and bankruptcy. Debt Management Plans allow you to protect your valuable assets, and at the end of them, your credit rating will look much healthier than if you had continued to miss payments, or had to file for bankruptcy.
- Interest charges on debts will be frozen, meaning that you can make your repayments and see the figure go down, rather than worrying about interest mounting up.
- Sets you on a positive path to repaying your debt, and relieving you from the financial burden.
- Stops all calls and letters from creditors immediately, relieving a lot of stress and anxiety.
- You only have to make one repayment per month, and your debt adviser will divide the money among your creditors.
- Your credit rating will improve as if you keep up with repayments, ad all negative information will be removed after you complete the DMP.
- You will have to pay the full amount of your debt, rather than getting some of it written off.
- Almost always affects your credit rating, even if just for the duration of the DMP.
Getting your debts written off
You may be in a situation where you can’t afford to pay anything towards your debts. You may be permanently unable to work, or have a terminal illness. These are really difficult situations, and the first thing to know is that you’re not alone and there are options to consider.
If you have circumstances where you are unable to offer any repayments towards your debt, you could ask your creditors to write off your debt. If creditors can see that they are unlikely to get repayments from you, you have no valuable assets that can be sold, and you prove that you are in a situation where it is not fair for them to keep pursuing the debt, they may agree to write off some or all of your debts.
However, creditors are only likely to agree to this in the most serious situations, and will ask for medical evidence and proof. If you get your debts written off in full, it will be marked in your credit history as paid. If your creditor is willing to write off part of a debt if you agree to repay the remaining amount in a lump sum, this will be marked on your credit file as a partial payment.
If you have a mental health issue that might affect your ability to make repayments, you can let your creditors know through a debt and mental health evidence form (DMHEF). This encourages creditors to be more considerate with you. When your creditor receives your form, they make appropriate adjustments to their debt collections process. Most creditors are likely to show more understanding if they receive a detailed DMHEF, which can ease a lot of stress for you.
Remember, that if you can’t make an agreement directly with your creditor to write off your debts, you can use the insolvency measures such as IVAs and DROs. These have the advantage of being legally binding, meaning your creditor can’t change their mind or do anything to get their money back.
Pros of getting a creditor to write off debts
- Releases you from your debt, as it gets written off
- Avoid fees you might have to pay for formal debt relief schemes
- If your debt is written off in full, it protects your credit rating
Cons of getting a creditor to write off debts
- Difficult to get a creditor to agree to this – your situation would have to be very serious, and even then there are no guarantees.
- You may have to deal with your creditor yourself, unlike formal debt relief schemes, which take over stressful communications for you
- If your debts are only partially written off, this negatively affects your credit score
Already been made bankrupt? Here’s what to do
If you’ve already been made bankrupt by the court, and you want to reverse this, you have the option of an Fast Track Voluntary Arrangement (FTVA). An FTVA essentially the same as an IVA, in that it allows you to pay off a part of your debt over a fixed number of years.
With an FTVA, the Official Receiver (an officer of the bankruptcy court), will help you put together a proposal for your creditors, with a monthly repayment that is affordable to you. If your creditors agree, the Official Receiver will oversee the payments. Getting an FTVA will remove your bankruptcy from the records, allowing you to protect your privacy and valuable assets. See our pros and cons list below, for more information on whether an FTVA is the right option for you.
- Allow you to protect valuable assets such as your house (unlike bankruptcy)
- Protects a job you may have lost due to bankruptcy
- Allows you to reduce monthly debt repayments at a cost that is affordable for you
- You’ll almost always end up paying more than you would if you were made bankrupt
You may be living with feelings of hopelessness, uncertainty and fear due to debt, but I hope this article has shed light on the many options you have to deal with it. As soon as you take action on your debt, you will feel better immediately and enjoy a future free of dread.