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Tackling your debts

Can a debt solution work?

Posted 10 May 2016

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A debt solution might be the answer if you’re looking to sort out your problem debt. Make sure you know how they work and what to do next.

If you’re looking for a way to solve the problem of unmanageable debts then, yes, a debt solution can work in some cases. There are several different debt solutions available, designed to help people in a range of different circumstances, so the most important thing to do is get professional advice so you know which one is right for you. 

If you want to speak to someone straight away about your options, use the buttons to the left – our experts are ready and waiting to answer your questions. 

In this blog we’ll introduce you to the idea of a debt solution, explain some of the differences between them and how they can help. 

 

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What is a debt solution?

A debt solution is exactly what it sounds like – a plan to help you sort out your unsecured debts and get them back under control. They all involve either reducing your payments towards your debts or suspending them altogether. 

Debt solutions that allow you to reduce your payments

Some debt solutions allow you to lower your payments on your unsecured debts. A Debt Management Plan (DMP) is one such solution, and if you live in Scotland, a Debt Arrangement Scheme (DAS) is a similar alternative. 

You can try to arrange lower payments on your debts by getting in touch with your creditors individually or by setting up a DMP using a company, such as ourselves, who will manage the whole process for you. When you start a DMP your monthly payments come down to an affordable, sustainable amount. 

You still pay back everything that you owe with a DMP, but this does mean that you’ll be paying back what you owe over a longer period of time.

A DMP is informal, which means it’s not legally binding and the amount you pay towards your debts can change – it’s even possible to go back to paying your contractual amount if your circumstances improve. 

In most cases creditors also agree to freezing interest and charges if they can see that you’re struggling to pay your debts back. 

So a DMP can work if you need your payments lowering but you’re still able to pay everything you owe back. 

Debt solutions that lower your payments and also write off debt

There are solutions that can bring your monthly repayments down as well write off some of your debts like Individual Voluntary Arrangements (IVA). Trust Deeds are an alternative for those that live in Scotland. 

With an IVA you pay less towards your unsecured debts, normally for a time period of 5-6 years and, if everything goes to plan, the rest of your debt is written off completely. Any interest or charges are also written off at the end of the arrangement. 

An IVA is a formal way to deal with insolvency and is legally binding on both you and your creditors. This means your creditors can’t take any further legal action against you, if you stick to the terms of the IVA. 

So an IVA can work if you need your monthly payments lowering, you can’t pay the whole of your debts off in a reasonable amount of time, and you need legal protection from your creditors. 

Debt solutions that suspend your payments

There are also debt solutions that suspend you payments altogether. Debt Relief Orders (DROs), and Minimal Assets Process (MAP) for Scottish residents, work in this way. 

With a DRO your payments are suspended for a year and after that time, if your circumstances have not improved your debts are written off. To qualify for a DRO you have to have less than £20,000 in unsecured debts and have less than £50 to put toward those debts each month. Your assets must be worth less than £1,000. Your car is counted separately, but must also be worth less than £1,000. You can have more than one car, as long as it doesn’t take the other assets over £1,000 when it’s included. 

So a DRO can work if you’re struggling to put any money towards your debts at all, and you have few or no assets. 

Bankruptcy

We’re going to look at bankruptcy separately as this solution sometimes means you have to pay something towards your debts but in other cases your payments can be suspended altogether. 

Bankruptcy is a way to deal with insolvency, as is Sequestration, which is the Scottish equivalent. 

When you’re declared bankrupt a Trustee (a court official) takes over the running of your financial affairs and looks very carefully at your situation. If the Trustee can see that you can afford to pay something towards your debts then you’ll start something called an Income Payment Agreement. However, you don’t need to pay anything if the Trustee agrees that you can’t afford it. 

If you meet all the terms of your bankruptcy the rest of your debts are written off at the end of the year, as they are on a DRO. 

Are there any downsides to a debt solution?

Although debt solutions can work very well in certain circumstances, there are downsides that you need to be aware of before you go ahead with any of them. 

With bankruptcy you assets are at risk and you may have to sell your home. Your assets aren’t at risk with an IVA but in some circumstances you will need to try and release equity from your home six months before the IVA ends. If you can’t release equity from your house, the IVA is extended so that you can continue to pay into it for up to twelve months. 

All debt solutions will damage your credit history as they all involve breaking the original contractual agreement you made when you first took the credit out. A solution would show on your credit history for 6 years from the date that you started it. This may mean that creditors will be less likely to lend to you in the future or that you have to borrow at a more expensive rate of interest. 

We hope this blog has given you a good overview of the different sorts of solutions available for problem debt. Having debts you can’t pay back can seriously impact your quality of life so it’s important to remember there are answers out there and experts who can help. Get in touch today and we’ll be able to tell you which debt solution, if any, is right for you. 

 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.