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Tackling your debts

How do you work out how much I’ll have to pay when I’m on a debt solution?

Posted 25 January 2016 by Shelley Bowers

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Want to know how we work out your monthly payments when you’re on a debt solution? Read on.

If you’ve got debts that you feel are becoming unmanageable, a debt solution could be the answer. They can help you get your finances back under control, while still paying off what you owe each month.

If you’re in England and Wales, there are four debt solutions to choose from. Well, we say choose from, what we really mean is there are a number of debt solutions available and each has its own set of eligibility criteria. It’s unlikely that you’ll meet the criteria for all the solutions available, so it’s a good idea to speak to a trained debt advisor before making any decisions about what you think you might do. They’ll look at your circumstances and work out the best way forward for you.  

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One of the main factors in choosing the right solution for you is to find out what your disposable income (DI) is each month. So let’s find out, what it is, how’s it’s worked out and why it’s important.

First thing’s first – a budget!

The first thing any trained debt advisor will do, when you speak to them about which debt solution might be the best for you, is prepare a budget. This will help both you and your debt advisor find out just where your finances are right now.

Any budget starts out by looking at what’s coming in – your income – and what’s going out – your outgoings – each month.

What does income include?

Your income includes, literally, every penny that comes into your household, so salary, benefits, pensions, allowances or money you’re given by other people, members of your family and the like, any money gained from investments.

What are my outgoings?

Outgoings are all the things you need to pay for each month, like food, transport, electronic services (telephone, internet and TV), and other essential costs, like clothes and shoes. As well as all the other priority bills that need paying, we don’t want you to risk losing your home or having your utilities cut-off. A list of the priority debts that usually need paying are as follows:

·         rent or mortgage

·         loans secured against your home

·         council tax

·         water charges

·         child maintenance

·         utilities

·         court fines

·         income tax, national insurance and VAT

·         hire purchase (HP) finance

·         TV licence

Disposable income

Next, we deduct your outgoings from your total income, so all your essential and priority bills are taken care of. Then we’ll look at what’s left over, this is called your disposable income, known as your DI.

Why does DI make a difference?  

Why does DI make a difference? Well, your DI is the amount of money that will be divided between the people you owe unsecured debts to. Your unsecured debts are:

·         personal loans

·         payday loans

·         bank or building society account overdrafts and loans

·         money you’ve borrowed from friends and family

·         credit and store cards

·         catalogue and doorstep loans

So it’s important to know how much money will be available for each lender when thinking about the correct debt solution. With bankruptcy it’s a little different. You may need to start an Income Payment Agreement, which means you’ll be expected to pay something towards your bankruptcy.  But this would only apply if you’re not living wholly off benefits and you have enough DI for it. So, whether you make any payments will depend entirely on your circumstances.

Eligibility criteria

Plus, it’s also used as an eligibility criteria for some of the debt solutions. For example, a Debt Relief Order (DRO) requires that you have no more than £50 DI left over per month. So, if your DI is more than this, you will not be able to enter into a DRO.

However, if your DI is less than £50 per month, and you decide to enter into a DRO, you will pay nothing towards your debts for a year, which is called a moratorium. If your circumstances have not changed by the time the year ends, your remaining debts will be written off and you’re not expected to pay anything further towards what you owe. Your DI is not the only eligibility criteria for a DRO – see our page about this debt solution here.    

Other considerations

When the budget is done, and your DI established, there are two other factors that your debt advisor will look at to determine which solution is the most suitable for you – your assets, including homeownership and how near you are to retirement.

Do you own your home?

If you own your home and you want to keep it, bankruptcy would be off the table as an option. This is because with this solution it will be necessary for you to sell your home if there’s any equity – or value – in it. If there’s negative equity in your home, you may still be able to enter into bankruptcy, so, if this is your situation, talk it through with your debt advisor first. Otherwise, as we said, you will usually have to sell your house, unless you have a very good reason why you shouldn’t be made to do so. And this reason will have to be exceptional, like if you’ve spent thousands having your home adapted for a disabled child or a partner who’s seriously ill.

So if, due to the severity of your financial situation bankruptcy really is the best option, but you’re a homeowner, you’ll have to think carefully about it.

Other debt solutions do not require you to sell your home, so they may be more suitable, as long as you meet the other eligability criteria.  

How near you are to retirement?

The type of debt solution your advisor chooses for you will also depend on your age. So, if you were due to retire in three years, an IVA would probably be off the table as they usually last for five years and you’d need to maintain your payments for the whole of that time. So, unless you can guarantee that you’d be able to continue making the payments once you lose your salary, another debt solution may be more suitable.

However, this is not always the case, as there is the option of IVA payments being altered along the way, so if a drop in your income is predicted in the future, and you knew by how much, and that you’d still be able to make some kind of payment, you may still be able to enter into an IVA.

As you can see, it’s pretty complicated trying to work out which solution is the best for you. That’s why we always advise that you seek the advice of a trained debt advisor. So, if you feel your debts have become unmanageable, you should consider speaking to one of our trained debt advisors. They’ll go through your finances, in detail, and advise you on the best solution for you. If you’d like to discuss your options, just choose one of the ‘contact us’ options on the left.    

 

by Shelley Bowers

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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.