The following are some suggested solutions to solving your personal debt issues. Should you wish to find out more contact one of our experts.
Possible solutions
Cut your outgoings
Prepare a detailed budget showing all of the money that you have coming in and going out each month. Review all your expenditure and make savings where possible. For example, check that you have the best deal for house and car insurance and that you are using the cheapest utilities provider. Look at your monthly direct debits and cut out any that are not essential.
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Re-mortgage
If you have equity in your property, then re-mortgaging may help you to deal with unsecured lending. However, this route is only likely to be available if you have a low level of mortgage compared to the value of the property and your credit history is still very good. You can check your credit history by applying to companies such as Experian and Equifax.
A re-mortgage can reduce the amount that you pay out monthly but you need to be aware that it may not be a 'cheap'way to pay back debt in the long term. You will need to bear in mind that your mortgage will be repaid over a very long time, so the actual amount that is repaid is likely to be far higher than the original debt, even if the monthly repayment is lower. Therefore you need to ensure that a re-mortgage really is the best long term solution to your problems.
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Debt consolidation involves taking out a loan to pay off some or all of your existing debts. This may allow you to make only one payment a month instead of to a number of creditors and the monthly amount paid may also be lower. You should bear in mind that the total amount repaid is likely to be higher than the existing debts.
You will also need to ensure that you do not start to build up debts on credit cards again, once the existing debts have been paid off by the loan. You should also consider the term of the loan and whether any payment protection insurance policy that you are asked to take out is suitable for your situation.
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You could approach one of the companies that offer to contact your creditors and set up a repayment plan with them. While this may seem attractive, it is often the case that you will simply be paying someone else to arrange a repayment plan that you could quite easily set up yourself. This means that the cost of running the plan could be used to repay your outstanding debts more quickly. Your creditors are likely to continue adding charges and interest, so it can take a number of years to actually repay the debt.
Debt management plans only work where the level of debt is manageable. In Scotland, a debt arrangement scheme could be put in place, if appropriate. Where your debts are out of control, you may need one of the options available under the Insolvency Act 1986 - an IVA or bankruptcy in England, Wales and Northern Ireland or a Trust Deed or sequestration in Scotland.
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Individual Voluntary Arrangement
An IVA is an agreement between you and your creditors to pay back a proportion of your outstanding debts. It can take the form of a one-off lump sum if you can raise equity through your home or borrow from family or friends. Alternatively, you can agree to make regular payments for a fixed period, which is usually five years.
A payment proposal is sent to your creditors outlining the offer and how it will be paid. The creditors then vote to accept or reject it. If you have sought the correct advice, it is normally accepted. Once you have complied with your obligations, you will once again be debt-free.
IVAs are governed by the Insolvency Act. They are flexible and are often used to ensure your home is safeguarded from attack by your creditors. They can also be very useful in situations where the self-employed would find it difficult to trade if declared bankrupt.
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Like an IVA, a Trust Deed is a voluntary agreement between you and your creditors. Under a Trust Deed, you will make payments from your income to a licensed insolvency practitioner (the Trustee), who will ultimately distribute sums to your creditors. The Trustee is also empowered to sell your assets to repay your debts. The Trust Deed is advertised in the press. If insufficient objections are received within five weeks, the Trust Deed becomes protected. Your creditors can then take no further action against you. Once the Trust Deed comes to an end, you are free of your debts.
Trust Deeds, therefore, offer the following benefits:
- the Trustee takes over all correspondence with creditors, relieving pressure on you;
- a Trust Deed generally lasts for three years. As long as you comply with the terms, your debts are discharged at the end of it;
- you will make payments only to the Trustee, rather than to all your creditors.
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Bankruptcy
While bankruptcy is a last resort, it is sometimes the most appropriate option, especially where there is no house to be dealt with or if your income has collapsed to a level that makes any repayment impossible.
Typically, most bankrupts will be discharged after twelve months but the Trustee in Bankruptcy has a duty to investigate the background to the bankruptcy. If the Trustee considers it appropriate, he can apply for a Bankruptcy Restriction Order, which suspends discharge for between two and fifteen years.
In addition, the bankrupt often finds it difficult to operate a bank account while bankrupt and their credit rating will be affected for up to six years after discharge. The bankrupt is also required to disclose all of their assets and these will, subject to some limits, be sold for the benefit of creditors. The bankrupt can also be asked to make a contribution from surplus income for a period of three years.
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Sequestration is a Scottish legal term for personal bankruptcy where you are formally declared Bankrupt by the Court. The process involves the transfer of your assets and property into the hands of a Trustee (a licensed insolvency practitioner) for the benefit of your creditors.
The Trustee has a duty to sell your assets/property. The Trustee may also seek a voluntary contribution from your income if you are in regular employment.
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