Debt guide: How to get out of debt, or get free help

There are many reasons why you might find yourself with debts that you cannot afford to repay; don’t assume that it’s always the result of bad money management or spending beyond your means. The loss of a job, the inability to work due to sickness, an unexpected pregnancy or the death of a loved one – they all have the ability to plunge you into debt.

The effect that debts can have on an individual or entire families can be more than just financial. Spiralling debts can cause stress, anxiety, and even depression. So what should you do if you find yourself struggling with debt?

The most important thing is to remember that there is help out there – and that you _can _get out of debt.

How much do you owe?

First, you need to fully understand the nature and extent of the debt you are in, including any loans, credit cards and overdrafts: work out exactly how much you owe and to who. While this may seem daunting, and something you would rather not fully face, there are different solutions available for different types and sizes of debts, so it is important to do this if you want to fully resolve your situation.

The money you owe will naturally fall into two categories: priority and non-priority debt. Your priority debts will include mortgage and rent payments, including any arrears, council tax bills, gas and electricity arrears, arrears of maintenance or any other payments ordered by the courts, tax arrears, and/or TV licence.

Non-priority debts are everything else you owe – including credit cards and loan debt.

Using the information you have collated, you should next formulate a budget and financial statement, detailing your average household bills and essential outgoings, and work out how much money you have left after all the bills are paid, and your priority debts are paid.

Maximise your income – and reduce your expenditure

State benefits

If you are out of work, suffering from a disability, on a low income or have a family, you may be entitled to state benefits. To find out how much (if any) you will be eligible for, you can simply enter your financial information on EntitledTo and get an instant assessment.

Budgeting loan

If you have received certain state benefits for more than six months, you may be entitled to some financial help in the form of an interest-free loan. If successful in your application, the money can be used for any purpose, but is meant for essential items that you can’t afford in one lump sum (such as furniture, white goods, moving costs, funeral expenses etc.) and is a great alternative to expensive loans, or high-interest finance agreements – and indeed, one of the best things you can do with a budgeting loan is pay off any debts that bear a high rate of interest. You can borrow from £100 up to £812 at one time, depending on the types of benefits you receive.

Hardship payments

Hardship payments are a reduced-rate payment of Jobseeker’s Allowance (JSA), Employment and Support Allowance (ESA) or Universal Credit (UC), depending on your benefit entitlement. To be eligible for a hardship payment, you must be able to show that without the payment, you or your family would suffer hardship. How much you will receive will depend on which benefits you receive.

Reduce your outgoings

Shop around for the best energy, broadband, insurance, and mobile phone deals. You could save a significant amount of money per month, which you can then use to pay off your debt, or at least ease your hardship while you pay it off.

It is worth noting that if you receive a letter from your credit card, mobile, or broadband provider stating that their pricing will be increasing, you may be able to leave them to find a better deal. The terms and conditions of each provider will differ, so it is always advisable to read the small print carefully to see if you can leave your contract early.

Speak to your creditors

If you are in financial difficulty, it is always worth asking your creditors (i.e. the institutions and issuers you owe money to) if you can pause your repayments for a while, to allow you to pay off your priority debts, or to get yourself straight. No creditor will agree to pausing of repayments forever, but if you have a valid explanation of why your situation occurred and why it will improve – you have been out of work but are now in employment, for example – they may agree. A word of warning though: some creditors may agree to pausing of payments, but they may mark it on your credit history, so it is always worth asking and then assessing whether it is worth it.

Ask your credit card issuer to write off your debt

There are no guarantees of success with this, and it should only ever be attempted in extreme circumstances. Be aware that issuers will need proof of your situation, and evidence that your financial situation is never going to improve, and even then they may never agree to your request. If your credit card issuer does agree to write off your debt in full, ask for this in writing to ensure that they will not pursue you in the future.

Strategies for optimising your repayments

You should always look to repay your priority debts first (including any arrears), as there can be severe consequences if you don’t.

Tap into your savings

It may sound obvious, but if you have any savings, it makes economic sense to pay off your debts with them (starting with your priority debt), as any default payments or increased interest on debts will always outweigh any interest you could be accumulating on savings.

Credit cards

The golden rule with credit card debt is that you should always pay more than the monthly minimum repayment, otherwise most of your money will go towards paying interest rather than the principal debt. The more you can afford to repay each month, the less interest will be added every month and the quicker the debt will be repaid.

Pay off the most expensive card first. If you have more than one card, check out the interest rates, and pay the highest one off first (while maintaining at least the minimum payments on the other cards!)

If you have a less than perfect credit rating, or you are unsure of what state your score is in, check your credit report with one of the credit reference agencies (Experian, Equifax or Callcredit). Here you can check for any errors or anomalies on your credit report, and correct them by contacting the relevant creditor, or at the very least become aware of whether you will be likely to be accepted for a credit card or loan before you apply.

If you have a good credit rating, shop around for a 0% balance transfer card, which can help you pay off your credit card debts without accruing further interest. There are many to choose from, and they are offering increasingly longer periods and lower fees. It is, however, important to work out the cost of fees against the length of the 0% period, to ensure you are getting the best deal. The golden rule with transferring your balance to such a card is to work out a regular payment plan to pay off your balance in full within the free period – and don’t use your card for any further purchases. Also, remember not to apply for too many cards within a short period of time, as this will likely leave a mark on your credit report and reduce your credit score.

If you need a longer period to pay back your credit card than you are being offered, consider a low rate card, where the rate will remain the same until you have paid off your credit card debt in full. Again, you need to do your sums first in ordered to ascertain how much you can afford to pay off and over what period this would be sustainable. It might also be worth considering a debt consolidation loan, where you transfer your credit card debt (and other debts too if applicable) to a loan. Loans can help because the interest on the credit cards ceases and you pay back a definitive sum over a set period, at the end of which you will be debt free. However, you do need to work out whether you can afford to commit to the repayments over the given period, as any missed payments can again harm your credit rating and make your debt problem worse.

If you own your own home, one option to consider is an equity release scheme. This is where you can release some of the capital from your home, and only repay it when you either die or sell your home. Generally, there are two types of scheme:

Home reversion schemes

With a home reversion scheme, you effectively sell a percentage share of your property (for below market value price) to a home reversion company, which then redeems their share when you either die or sell the property. So, for example, if you sold 40% of your home to the reversion company, the provider would be entitled to redeem a 40% share of the full market value when you sell the property or die.

Lifetime mortgages

With a lifetime mortgage you borrow against the value of your home, and interest is charged on the amount, rolling over every year, until you either die or sell the property.

You should seek professional advice before using an equity release scheme: the interest charged sometimes constitutes quite a considerable percentage of the value of your home, and may not be the most suitable scheme for you.

Alternatives to self-management of debt

If you can no longer cope with your debts, either financially or emotionally, or both, there are plenty of alternatives to managing your debt, with many organisations offering free debt advice and some who will manage your debt on your behalf.

Debt management plan

Debt management plans (DMP) are informal arrangements made between you and your creditors to stop the interest on your debt, and for you to pay a reduced amount of money on a regular basis, either for a set amount of time until your debt is paid off, or until your financial situation improves.

You can sort this out yourself, but if you have multiple debts, or find the idea too daunting, there are third party specialist companies that will do this for you free of charge (see the list of organisations at the bottom of this guide). They will work out a budget statement, based on all your debts, bills and living expenses and an affordable amount of your disposable income is then paid to your creditors every month.

While you are in a debt management plan, your creditors cannot pursue you for the debt and all the interest is frozen.

It is important to stress that you do not need to pay for a debt management plan. Some companies do charge a fee, but there are plenty available that do not.

An alternative for those people living in Scotland is a debt payment programme (DPP) through the Debt Arrangement Scheme.

Undergoing a DMP or DPP may have a negative effect on your credit rating.

Administration order or composition order

An administration order is a legally binding agreement organised through your local county court. You will make one payment to your local court every month, and this will be divided between your creditors. An administration order is only suitable for people who:

  • Have at least one unpaid county court judgement against them
  • Have debts of less than £5,000
  • Have two or more debts

If your application is accepted, the interest on your debts will be frozen, and your creditors will not be able to pursue you or take any further enforcement action against you for the duration of your administration order. After filling out an income and expenditure form, the court will decide how much you will need to pay towards your debts every month. This amount will then be divided between your creditors on a pro rata basis until your debt is paid off.

If your debt will take too long to pay off at the amount you can afford, the court may decide to instead apply for a composition order, which is an agreement to pay a set amount each month for a definitive period of time (typically three years) with the rest of your debt being written off.

To apply for an administration order, you will need to fill out form N92, which can be obtained from the Gov.UK website.

If you feel that the debt will take too long to pay back at the amount you can afford each month, and you would like to be considered for a composition order, you should explain this on section C of the N92 form.

There is no up-front fee to apply for either an administration order or a composition order, although the courts do take up to 10% of your payments as an administration fee, with the rest of the payments going to your creditors on a pro rata basis.

Undergoing an administration order or composition order may have a negative effect on your credit rating.

Debt relief order

A debt relief order (DRO) is a cheaper form of bankruptcy and is a formal arrangement organised through the courts. An arrangement is made where, for a specified amount of time (usually a year), you don’t have to pay anything to your creditors, and after the specified time, if your financial situation has not improved, your debts are written off. Debt relief orders are suitable for people who:

  • Owe less than £20,000.
  • Have only £50 of income each month after paying tax, national insurance and all normal household expenses.
  • Have lived or worked in England or Wales in the last three years. (If you live in Scotland, you can apply for a Low-Income Low Assets or LILA bankruptcy.)
  • Your assets are not worth more than £1,000 in total.
  • You have not had a DRO in the last six years.

Not all debts can be included in a DRO. Exclusions include magistrate’s court fines, child support payments or arrears, student loans, social fund loans, and compensation for death or injury. The amount of these debts cannot be included in the £20,000 limit, and you are still liable for them after the debt relief order has ended.

To apply for a DRO, you must go through an ‘approved intermediary’ via ‘competent authorities’ who will apply on your behalf. For a list of such third parties, see the Gov.UK debt relief order page.

A debt relief order costs £90 – and undergoing a debt relief order may have a negative effect on your credit rating.

Individual voluntary arrangement (IVA)

An IVA is a formal arrangement between you and your creditors, arranged by an insolvency practitioner (IP), where you agree to pay a regular sum of money for a period of usually five or six years to pay off all or part of your debts. Any remaining debt after this time is written off. 75% of creditors (by value) need to agree to the terms of the IVA for it to be processed.

An IVA is a significant undertaking, in that if you do not keep up the repayments, the insolvency practitioner could apply to make you bankrupt. Also, if you own your own home, your creditors may demand that a charge is placed on your property so that they receive their share of your debt when you sell your home. The full details of your IVA will be discussed with the insolvency practitioner, so it is important to ensure you are aware of the ramifications of such an undertaking.

There is a substantial administration fee to start an IVA, and ongoing fees for the entire period the IVA is running. It is important to check what fees you will be paying and how this will affect your repayments.

The ramifications of an IVA on your credit rating are similar to that of bankruptcy, in that it will remain on your file for six years and you may find it difficult to receive credit during that time, or you may pay higher interest rates for borrowing.

To search for an insolvency practitioner in your area, visit the Gov.UK website.

IVAs are not available if you live in Scotland. There is the option of a Protected Trust Deed, but the rules, benefits, risks and fees are different from an IVA.

Undergoing an IVA may have a negative effect on your credit rating.

Bankruptcy – or ‘Sequestration’ in Scotland

Bankruptcy is a legal procedure for people whose unsecured debts outweigh their assets, including any property and vehicles, and is suitable for those who have no hope of paying off their debts within a reasonable time. If you are successful in your bankruptcy application, all your ‘permissible’ debts are written off, and, in most cases, after 12 months you are released from your bankruptcy. If your disposable income is high enough, you may be asked to contribute to your debt for a period of three years. This can be either as an ‘income payment arrangement’ (IPA), or an ‘income payment order’ (IPO).

Some debts can’t be included in bankruptcy and will still remain after your bankruptcy is over, such as:

  • Any payments a court has ordered you to make under a confiscation order
  • Debts you did not inform the insolvency practitioner about when the bankruptcy was applied for
  • Magistrates court fines
  • Maintenance payments and child support payments
  • Secured loans
  • Social fund loans
  • Some benefits and tax credits overpayments
  • Student loans

If you are having trouble filling out the forms, or would simply like some advice, the Insolvency Service runs a helpline (0300 678 0015) that is open from Monday-Friday 9am-5pm. If you would prefer some face-to-face help with the bankruptcy forms, contact your local Citizen’s Advice Bureau.

Bankruptcy fees

As of April 2018, the fees for bankruptcy stand at £680, which consists of an adjudicator fee of £130 and a deposit of £550. This must be paid when you apply for your bankruptcy online via the Gov.UK website.

If you cannot afford the bankruptcy fees, there are some charitable organisations that may be able to help towards this. Start by searching through Turn2Us’s database of such organisations.

The process of bankruptcy

Once the bankruptcy online forms and fees have been submitted, your case will be judged on its merits by an adjudicator, who will contact you (usually by phone) to discuss your case further and they will then decide if you should be made bankrupt.

If it has been deemed that you are eligible for bankruptcy, you will be assigned an official receiver (OR), who will freeze your assets and contact your creditors.

During your bankruptcy period (which usually lasts for around one year) you will have to follow ‘bankruptcy restrictions’, which means that:

  • You can’t borrow more than £500 without informing the lender that you are bankrupt.
  • You can’t act as a director of a company, or promote, form, or manage a limited company (either directly or indirectly), without the High Court’s permission.
  • You can’t manage a business under a different name to the one you had when you were made bankrupt, without informing the people you deal with that you are bankrupt.
  • You will be disqualified from working in some regulated professions, such as law, accountancy, and financial services.

If you are found to be undertaking any one of the above during your bankruptcy period, or indeed being dishonest about your finances in any way, your insolvency practitioner can request that you undertake a bankruptcy restriction undertaking (BRU), where you will have restrictions in place for a period of time exceeding your nominal 12 months, which could be as long as 15 years. If you refuse to comply with this request, your insolvency practitioner can go to court and get your BRU upgraded to a bankruptcy restriction order (BRO), which is the same as a BRU but with the added legal weight of a court order.

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Last updated: 31 May, 2019