Many people learn the hard way that it is much easier to get into debt than to get out of it. Fortunately, when personal debt gets out of hand there are numerous options available to fix the problem. The bad news is that there are no quick or easy fixes, despite what you may sometimes see in the adverts that promise to make your debts go away almost overnight. Here are some possibilities to consider when trying to figure out the best way out of your debt disaster.
DMP, IVA or DRO?
Oftentimes people who are having debt problems turn to lenders who offer various types of debt consolidation loans. For some, a Debt Management Plan or DMP is a viable solution. A DMP is simply an agreement between you and your creditors to pay all of your debts. These types of agreements work best for people who can only afford to pay creditors a small amount each month, or those who have debt challenges but are reasonably certain that they will be able to make payments within a few months.
You can either make arrangements with your creditors yourself, or you can do it through a licensed debt management firm, which will charge you a fee. If you use a debt management company, you make regular payments to the company, and they distribute the money among your creditors. The company decides what your monthly payments will be, and contacts your creditors to ask them to agree to the plan. (Your creditors are not required to agree to these plans, but many will do so because they’d rather get small monthly payments than none at all.) Be very careful when choosing a debt management company: make sure they are authorised by the Financial Conduct Authority (FCA).
Some people have more serious debt problems and/or require a more regimented programme than a standard DMP. For the truly insolvent, an Individual Voluntary Arrangement (IVA) may be a reasonable debt solution, particularly if you have significant assets to protect, such as equity in a house or shares in a private company.
An IVA is a long-term (generally five-year) legal contract between you and your creditors, but you should know that it generally cannot be easily altered or terminated. If you own a home with equity, you may very well have to remortgage in the last year or make an extra year of payments. Although all of your remaining debts will be wiped out t the end of an IVA that completes successfully, currently about 20-25 percent of IVAs fail.
Check with a debt charity such as your local Citizens Advice to see if an IVA is really the best solution for you. If you don’t have significant assets there are other solutions that will be shorter-term and will probably be less costly.
For instance, a Debt Relief Order, or DRO, may work better for you, and in some cases even if you are already in an IVA agreement you may be able to switch to a DRO. A DRO has sometimes been described as “bankruptcy lite” because it allows you to get rid of your debts and is much simpler than bankruptcy. As well, it is significantly less costly in fees (a mere £90). However, it has very strict rules, and unlike most other debt solutions you must meet all of the criteria. You have to owe less than £20,000; you must have less than £50 a month spare income after paying all your normal bills and expenses; you can’t own a house; you can’t be a company director; and there are several other criteria.
One advantage of a DRO is that you don’t have to make any monthly payments. And most of your debts are wiped out after a year, with notable exceptions such as student debts and magistrates court fines.
As with any other type of debt solution, a DRO isn’t for everyone. It seems to work best for people who receive all or most of their income from benefits. DROs may be sensible choices for pensioners and those with long-term health conditions. Debt charities such as Citizens Advice and StepChange can help you set up a DRO.
What if you need to borrow money whilst working to get out of debt?
It would seem to be self-evident that if you are already struggling to get out of debt – particularly to the point of considering an IVA or a DRO – you don’t want to take on any additional debt. But sometimes emergencies arise and no matter how carefully you have been managing your money, you find yourself in need of extra cash. You may feel that you have no choice but to take out a personal loan.
If you have debt problems, however, you may have credit challenges as well, and you will have limited choices when seeking a loan. There are short-term loans available for people with bad credit; these loans don’t require credit checks, but they do have high interest rates. When considering such a loan, be sure to shop around to find the best lender for your needs. Your due diligence will help you avoid paying any more than necessary, and reading the reviews of other customers can aid you in finding a lender with a good customer service record.
Be especially careful if you are already in a debt management programme, such as an IVA agreement. Taking on more debt may make it more difficult for you to meet your IVA payments, and you run the risk of causing the IVA company to fail the arrangement because you have broken the terms. Be sure to talk to your caseworker to ensure that you aren’t making your problem worse. If you are having a financial crisis you may be able to negotiate reduced payments on your IVA, or at least a “payment holiday” to help you save money to cover a financial emergency.
Be aware of all of your options
The takeaway lesson is that there is more than one way to get out of debt. There are numerous debt charities with an abundance of free online information, and the ever-helpful gov.uk site has devoted a section to options for paying off your debts.
If all else fails and you cannot pay off your debts, you can be made bankrupt, and the Government web site also has links to information about bankruptcy. Getting out of a problem debt situation is rarely easy and as noted above it isn’t something that can be done instantly. But it’s worth the effort, not only for the sake of your bottom line but also for your peace of mind.