The truth about bankruptcy
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Your disposable income is the amount you have left to put towards your debts after all your other essential bills and expenses have been paid.
If you’re in debt and have been looking into the solutions available to solve the problem, you’ve probably come across the term disposable income (DI). In this blog, we’re going to explain what this means and why understanding your disposable income is such an important part of getting debt free.
What is it?
Put simply, your disposable income is the amount you have leftover each month to put towards your debts.
But leftover after what? Well, your level of DI takes your other essential bills and expenses into account as well.
It’s the number you get to once you’ve already paid your Council Tax, secured repayments, transport costs, food costs, utilities, rent/mortgage – absolutely everything that’s essential to your life. Once those bills have been paid, whatever you have left is the amount you can put towards your unsecured debt repayments – income that’s disposable.
Does my DI affect which debt solution I can start?
When it comes to finding out which debt solution is right for you, your DI is very important.
There are a number of debt solutions available and each one is designed to help in slightly different circumstances. For instance, an Individual Voluntary Arrangement (IVA) might be suitable if you’re a home owner and you can afford to pay some, but not all of your debts back. Or a Debt Management Plan (DMP) might be better if you can afford to repay everything you owe, you just need your monthly repayments to be cut so that you can afford them.
To find out which debt solution is right for you, you need to speak to a trained debt advisor. They will take you through your income and expenditure to find out what your DI is. They’ll need to know how much you spend on each area of your life and how much you earn each month. Once they’ve got those two figures, they can work out how much you have spare each month. They will then be able to recommend which debt solution is right for you based on your DI, as well as other aspects of your life, like what you do for a living and where you live in the UK.
Let’s look at the example of a Debt Relief Order (DRO) to bring this to life. A DRO is a formal solution, which means that it is legally binding for you and your creditors, and is one way to deal with insolvency. Technically, insolvency means that you can’t afford to pay your debts when they are due, or that your assets are worth less than your debts.
DROs are designed to help those who are struggling the most with their debts and who don’t have a lot of money to put towards them once their essential bills have been paid. In fact, in order to qualify for a DRO, you have to be able to show that you have less than £50 in DI each month. You also can’t be a home owner, have assets that amount to over £1,000, or a car worth over £1,000. Your debts can’t total more than £20,000 in either. So as you can see from this example, your level of DI can sometimes have a bearing on which debt solution you qualify for.
Another useful example to look at is bankruptcy. If you went bankrupt, your financial affairs would be looked after by a Trustee. They would look at your income and outgoings and decide whether you have enough DI to put something towards your debts while your bankruptcy is ongoing, known as an Income Payment Agreement (IPA). If you can’t afford to, or your income is made up solely of state benefits, then your payments towards your debts are suspended altogether during your bankruptcy.
In order for you to start a debt solution, your creditors have to agree to a new repayment plan and they do have guidelines in terms of what they think is reasonable for you to spend on certain areas of your life, like hobbies, sports and satellite TV. This is because they would be looking to help you by either freezing interest and charges, or by agreeing to write debt off, but they also want to make sure you put as much money towards your debts as can be reasonably expected, so the agreement is fair to everyone. Your debt advisor will be able to go through all this with you, so you know exactly where you stand with creditor guidelines.
Struggling with your repayments?
If you’re struggling to find any spare money to put towards your debts, you need to look at your budget and get expert debt advice.
To put together a budget, you need to write down absolutely everything you spend money on and absolutely everything you earn. Once you have those two figures, take your outgoings from your income and see what you have left. Don’t forget to take into account those infrequent outgoings as well, like your TV license and insurance renewals. You might be able to tweak your outgoings here and there in order to free up some more cash.
If there simply isn’t enough money coming in to cover everything that you have to pay for, it’s time to get debt advice – you can speak to one of our experts using the options at the top of the page. As we said above, they will be able to guide you through your options and recommend the best solution for your particular circumstances.
by Christine WalshBack to blog home