When it comes to dealing with your debts, there are several options. You should always consult a trained adviser before deciding which you want to go for, as they will be better positioned to consider which option will meet your needs best.
What is it? – This is a ‘self-help’ type solution. You will need to work out your budget and add up what you owe to each creditor. You then need to contact them to make an offer to pay whatever you can afford. Our Debt Handbook talks you through this process in much more detail. If you have no income left over after paying for your necessary costs of living your creditors may be willing to let you make no payments for a short time until you get back on your feet. You will also need to ask creditors to freeze the interest on your debts otherwise your debt could keep growing.
How much must I owe and what kind of debt can it be? – There are no minimum or maximum levels of debt, and any credit debts can be included.
How long will it last? – No time limit. Payments can be spread over as much time as it takes for you to clear your debts.
Advantages – You can negotiate this sort of agreement yourself and it is widely accepted by creditors and recognised by the courts. You can also make higher payments when you are able and reduce them if your circumstances change and you find you can’t afford to pay so much.
Disadvantages – It will affect your credit rating. You will have to pay off all your debts, which may take many years. You will also have to make sure you keep on top of your payments as you will be organising these yourself. Creditors might want regular reviews of your situation to make sure you’re still paying as much as you can afford. Creditors can refuse your offer, although you can always ask them to reconsider. They are more likely to accept an offer made through a debt advice agency – see our Who Can Help? section for details of how to get in touch with an agency that may be able to assist you. Creditors might try to take you to court, particularly if you own your own home, as they may be able to get a charging order on the property.
For more information on making an informal agreement with your creditors see our Debt Handbook section or speak to an adviser. See our Who Can Help? section for more on how to get in touch with an advice agency.
How much must I owe and what kind of debt can it be? – Usually for debts over £5000. Any credit debts can be included. You will usually need to have at least 3 creditors to be eligible for a DMP.
How long will it last? – There is no time limit, so you may be paying off your debts for many years.
Advantages – This is generally accepted by creditors as a fair way of paying off your debts. The debt management company will help you work out what you should pay each creditor and will deal with them on your behalf, all you need to do is keep up the payments to the debt management company. This can take a lot of the pressure off you if you are worried about dealing with your debts. You may also be able to reduce or increase your payments if your circumstances change. The debt management company should review your situation with you on a regular basis.
Disadvantages – It will affect your credit rating. You may not be able to reduce your offers below the £100 a month minimum. This can make things difficult if you have a change of circumstances. The debt management company cannot force creditors to accept your offer, although they may be more likely to accept offers made through such an organisation. Creditors may still take court action against you. It is also important to be careful which company you choose, as sometimes it is difficult to tell which charge a fee for their service. If you need advice you can contact National Debtline on 0808 808 4000 or visit their website here
For more information on debt management plans click here
What is it? – An AO is a county court order instructing you to make a single payment every month to the court. The court will then divide this up and distribute it to your creditors. You must have a County Court Judgement or a High Court Judgement in place to be eligible for an AO.
How much must I owe and what kind of debt can it be? – This can be used for credit debts and some priority debts of £5,000 or below.
How long will it last? – Usually there is no time limit, which means you may be paying for many years until your debts are cleared. You may be able to ask for something called a ‘composition order’ which could mean your debts will be written off after only 2 or 3 years.
Advantages – The court will take over dealing with your creditors and making payments on your behalf and none of the creditors included in the AO can take any further action against you without the court’s permission. Interest and other charges will be stopped and there is no up-front fee to pay (the court will take a small charge of 10p from every £100 you pay in). You may be able to alter your payments if your circumstances change and you cannot afford your usual payments, or if you want to pay more than usual. If you apply for a composition order you will only have to make payments for a limited period such as 3 years.
Disadvantages – It will affect your credit rating. You cannot have debts above the £5000 limit, and some creditors can ask not to be included in the order, although the court does not have to accept this. If you do not keep up with your payments the administration order can be revoked, meaning your creditors are free to pursue you again for the money you owe them.
For more information on administration orders click here
What is it? – An IVA is an alternative to bankruptcy. It involves making a formal arrangement through the courts to pay an agreed amount to your creditors over a set time period such as 5 years, or you may be able to arrange to make a one off lump sum payment. After this the rest of the money you owe is written off. IVAs must be arranged through an insolvency practitioner, who will charge you a fee which may have to be paid up front. The majority of your creditors must agree to the IVA.
How much must I owe and what kind of debt can it be? – No limit, but due to the administration and other costs it is usually not worth getting an IVA unless you owe over £15,000. Most debts can be included, except secured debts, rent, student loans, court fines and child support.
How long will it last? – There is no time limit, but usually an IVA will last for five years.
Advantages – AN IVA has less stigma attached to it than bankruptcy and does not involve any publicity. There are also fewer restrictions than with bankruptcy, for instance you can continue to trade if you have a business. All your creditors will be bound by the IVA even if they voted against it, as long as the majority vote in favour, and most types of debt can be included. Your insolvency practitioner may allow you to pay the fees in monthly instalments, however, you need to check this before you sign up.
Disadvantages – This will affect your credit rating, and a record of the IVA will be held on the public Individual Insolvency Register. IVAs are expensive (usually costing around £4,000) and you will need to have a large amount of easily accessible disposable income, particularly if fees need to be paid up front. A lot of IVAs have a built in requirement that you revalue your home and release equity from it to pay the creditors after a certain number of years of payments (usually five).
Your IVA may also fail. Some IVAs fail because the monthly payments agreed to are too high. If your circumstances change creditors may be unwilling to accept a lower offer and this can be another reason for failure of an IVA. If your IVA does fail you can still be made bankrupt. You need to be sure an IVA is right for you; recently there has been a growth in unscrupulous companies who may offer to set up an IVA for you even if it is not the best option for your circumstances.
For more information on individual voluntary arrangements click here
What is it? – A debt relief order will allow you to write off your debts after a year if you cannot pay them. They are suitable for people who rent their home, have few assets and very little spare income. You are unable to apply for a DRO yourself, you must use an Approved Intermediary – usually a Debt Adviser. To qualify you must be unable to pay your debts; have less than £50 a month spare income after you have paid your normal living costs; have debts of under £15,000; not have assets worth more than £300 and if you own a car this must not be worth more than £1,000. You cannot apply for another DRO if you have already had one in the last 6 years.
How much must I owe and what kind of debt can it be? – These are for debts of under £15,000, and can include most kinds of debt except student loans, court fines and child support.
How long will it last? – You will be discharged from your debts after a year.
Advantages – There is no court hearing, so this may be a less stressful way of dealing with your debts. After a year you can make a completely fresh start, all debts included in the DRO will be written off. The DRO can include most of your debts, including priority debts like rent, council tax arrears and fuel bills. There is a cost of £90 to set up a DRO but this can be paid in instalments and is much less than you would pay to go bankrupt. Once you have the DRO, creditors cannot contact you and you will not have to make any monthly payments on your debts.
Disadvantages – Details of your DRO will be kept in the Individual Insolvency Register. This will affect your credit rating. You cannot apply if you own your home as this will be counted as an asset. Similarly, any pension you have built up will be counted. There are some debts which cannot be included in a DRO, for example you cannot include magistrates’ court fines, student loans and child maintenance payments. If you forget about any debts at the time you apply, they cannot be added later so they will also be excluded from the DRO. If you have committed fraud the official receiver may be able to take action against you, and you may have a ‘debt relief restriction order’ made against you for dishonesty or ‘unfit conduct’. You cannot apply for another DRO if you have already had one in the last 6 years.
For more information on debt relief orders click here
What is it? – Bankruptcy is when you do not have enough money to pay your debts so your assets are sold off instead to try and raise the necessary funds. Any unpaid debts are then written off. You can apply to make yourself bankrupt or your creditors may do it on your behalf. Your financial affairs will be passed over to the official receiver, who may sell off many of your assets in order to pay your creditors the money you owe them. If you have no assets the debts may be written off. Bankruptcy usually lasts a year but you may have to make payments for 3 years.
How much must I owe and what kind of debt can it be? – A creditor can only apply to make you bankrupt if you owe £750 or more. However, you can make yourself bankrupt however much you owe. Most debts can be included, except student loans, court fines and child maintenance.
How long will it last? – Usually people are discharged from their debts after a year. If you have any income left over after paying necessary living expenses you may have to make payments for three years.
Advantages – After a year you are able to make a fresh start, and your debts can be written off if you have no assets. Monthly payments can only last a maximum of 3 years. If you own your own home you may be able to avoid selling it if a friend or family member can buy out your share of the property. Creditors can only take further action against you if you own your own property.
Disadvantages – Bankruptcy will affect your credit rating. Details of your bankruptcy will be held on the public Individual Insolvency Register and published in the London Gazette, and there are many restrictions which accompany a bankruptcy. For instance, if you have your own business it may be closed down, and your employment may be affected. If you apply to make yourself bankrupt you will have to find a fee and deposit totalling £705. You could lose your home if you are a home-owner, and any creditors who you have secured loans with may be able to pursue you. Any other assets will also be sold by the official receiver. Not all debts can be written off through bankruptcy, for example student loans, court fines, child maintenance and child support cannot. The official receiver may be able to take action against you if, for instance, you have committed fraud, and you may have a ‘bankruptcy restriction order’ made against you for dishonesty or ‘unfit conduct’.
For more information on bankruptcy click here
What is it? – This is when you take out a new loan from a bank or high street lender and use the money to pay off all your debts. These are known as consolidation loans. If you own your home then the lender may wish to secure the loan against your property. It’s important you shop around to try and find the best deal as different companies will offer different rates of interest and some may be more competitive than others.
How much must I owe and what kind of debt can it be? – There is no minimum or maximum level of debt or particular type of debt which can or cannot be covered. This will depend entirely upon what the lender is prepared to loan you.
How long will it last? – The length of the loan will also depend on your lender.
Advantages – This will not affect your credit rating unless you cannot keep up with payments. You may find it easier to keep on top of what you owe as you will only have to make one monthly payment rather than one to each of your creditors. This payment may also be lower than the combined cost of all the payments you were making previously.
Disadvantages – You should always think very carefully before taking out another loan. Although the payments for your consolidation loan may be lower than the combined cost of paying all your creditors, they will usually be spread over a longer period, meaning you could be paying the debt off for a long time and overall it will cost you much more. You also need to be wary of interest rates if you have a poor credit history, as you may be charged a lot of interest or lenders could refuse to offer you a consolidation loan at all. If you choose a loan with a variable interest rate beware this can change and may suddenly rise. Make sure you have budgeted to cope with this. If the loan is secured on your house your home may be repossessed if you do not keep up with payments.
For more information on consolidation loans see our Loans section.
What is it? – This is when you make a partial payment towards your debts and ask your creditors to write off the rest. You can either make this payment as a lump sum or as instalments over a set period.
How much must I owe and what kind of debt can it be? – There is no minimum or maximum level of debt and usually all credit debts can be included.
How long will it last? – Usually debts are settled immediately unless payment is in instalments.
Advantages – You do not have to pay the full amount, only what you can afford. You are free to make a fresh start once you have paid the agreed amount. You may find it easier to keep up with payments if you know they are only for a certain amount of time.
Disadvantages – The debts will still be shown on your credit file and may stop you getting credit in future. You will have to find a way to raise the money if you intend to pay a lump sum. You may have to ask family and friends for help with this or use savings which you had been planning to spend elsewhere. It is also possible that a creditor may refuse your offer and take you to court. If the creditor agrees to your offer it is extremely important that you have a written record of this from them before you make any payment.
For more information on offers in full and final settlements click here
What is it? – If you have no available income to pay off your debts after paying your household bills then you may be able to convince your creditors to write off the debts you owe. In order to do this you will need to convince creditors that your situation is unlikely to improve and there is little point in them continuing to chase you for the money. This is only likely to be possible in extreme situations, for example if you have a serious illness which is unlikely to improve.
How much must I owe and what kind of debt can it be? – There is no minimum or maximum level of debt and any credit debts can be included.
How long will it last? – Debts cleared immediately.
Advantages – Your debts are cleared immediately and you don’t have to worry about making any payments. You will be able to make a fresh start.
Disadvantages –The debt will still show up on your credit file and may prevent you from getting credit in future. It can also be extremely difficult to get debts written off. Creditors are unlikely to agree to such an arrangement without very good reason, and even if they do decide not to pursue the debt they will often not put this in writing, so they may change their minds in future and decide to chase you again.
For more information on write-offs you will need to speak to an adviser. See our Who Can Help? section for more information.
How much must I owe and what kind of debt can it be? – Varies – some organisations may only help if you owe above a certain amount but there is no general minimum or maximum level of debt. The type of debts which can be included will also vary depending on the charity, for instance trust funds are often specifically to help with energy bills.
How long will it last? – Debts will be cleared or reduced straight away.
Advantages – A charity payment may reduce or completely pay off an outstanding debt immediately, with no obligation on you to pay any of the money you owe. You will then be able to make a fresh start.
Disadvantages – Charities and trust funds have limited resources and so may be quite selective about who they help. You will usually have to fill in quite a detailed application form to help them see if you are eligible, although you may be able to get support from an advice agency to help you fill this in. If you do not fit specific criteria you may struggle to find a charity that can assist you. Charity payments are unlikely to be able to help with large debts as they have limited funds. They are also unlikely to help with anything other than emergency or priority debts.
For more information about charity payments towards your debts go to our Trust Funds page or visit the Turn2Us grans page