What will happen if I get
into debt?
What can I do to sort out my
debts?
What are priority debts?
Helpful tips
If you are not sure about the
extent of your problem then try filling in our Debt Calculator
This will help you calculate how much money you have left over each month to pay your debts (creditors).
For specialist, confidential advice contact the Debt Solutions Helpline on
0844 669 7554.
Debt restructuring. Options for those with serious debt problems
Debt management plans
What is a debt management plan?
What fees will I have to pay?
Advantages & Disadvantages
How to set up your own self help debt management plan
Individual Voluntary Arrangements
What is an IVA?
What fees will I have to pay for an IVA?
Advantages & Disadvantages
What is the process for getting an IVA approved?
Bankruptcy
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What will happen if I get into debt?
If you miss the odd credit card or loan repayment, probably not much will happen. There might be a penalty charge and, of course, your debt won't have got any smaller and it might get recorded on your credit file.
But if you persistently miss credit card or loan repayments or fail to pay bills, you will quickly run into serious problems.
A County Court Judgement (CCJ) might be made if you are taken to court for non-payment. The County Court can make an order for monthly payments to be made to the lender. The amount is usually decided between the lender and the debtor. If this cannot be agreed upon the Court will decide.
If you have more than one lender, then you can ask the Court to arrange an administration order which allows for all the debts to be added together. An administration order can only be made for debts totalling less than £5,000. One payment is made every month to the Court who share it out among the lenders.
If your debts are severe, you run the risk of a bankruptcy order being made against you. This is usually a last resort. Things you own then have to be sold and trustees control your money to ensure that lenders you owe money to get back as much as possible of the money you owe.
If you are made bankrupt on or after 1 April 2004, you will usually be 'discharged' after one year. If you were made bankrupt before this date, you will probably be discharged on 1 April 2005 (or earlier if your bankruptcy was due in any case to end before then).
If you are a home owner, the lender can, in some cases, apply to the courts for a 'charging order' to secure the debt against your home or property. This means that when the property is sold, the lender would be paid out of the proceeds. These debts often continue accruing interest until repayment.
If you are bankrupt or have a County Court Judgement or a record of unpaid debts on your credit file, you will usually find it hard to get normal credit - eg a credit card, mortgage or other loan, or quarterly bill arrangement for the phone or fuel (this involves credit because you use
the service in advance of paying).
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What can I do to sort out my debts?
If you have a debt problem, it is best to face up to it sooner, rather than later. Take steps to sort it out, for example:
- work out your budget and decide how much you can afford each week or month to pay off your debts, putting priority debts at the top of the list.
- contact all your creditors as soon as possible. Explain the problem and how you intend to pay;
- offer to pay off the debt at an amount you can afford, even if it's only a small amount per week or month. Most creditors know this is exactly what a court would order, so they have little to gain by taking you to court.
- cut out all unnecessary spending and cut up store cards and credit cards so you can't run up more debts;
- can you increase your income - eg by working more hours, taking in a lodger, claiming benefit?
- consider switching to a basic bank account that doesn't let you overspend but check that you will still be able to carry out all the transactions that you need to;
Don't struggle alone. There are lots of agencies that can help you sort out your debt problems or help you to find somebody who can. These include:
Citizens' Advice Bureaux
See phone book for local branch
www.citizensadvice.org.uk
National Debtline
0808 808 4000
www.nationaldebtline.co.uk
Money Advice Scotland
0141 572 0237
www.moneyadvicescotland.org.uk
However, please be aware that most government run advisory agencies and charitable organisations employ staff who have basic qualifications only and. despite operating with the best of intentions, tend to advise individuals to enter into debt management plans when they would be financially better off seeking alternative options.
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What are Priority Debts?
Some debts are more important than others because the consequences to you of not paying are so severe. These debts are known as priority debts. The law gives different creditors different ways of getting their money back. For example:
- if you fail to pay rent, a court order could be made to evict you;
- if you don't keep up mortgage repayments, the lender can ask the court to make an order to evict you and sell your home;
- if you don't pay fuel bills, your gas or electricity can be cut off;
- if you don't pay your phone bill, the phone can be cut off;
- if you don't pay council tax, you can be sent to prison;
- if you don't pay income tax, the Inland Revenue may take bankruptcy proceedings;
- if you don't pay court fines, you can be sent to prison.
Under no circumstances should you ignore priority debts. It is important you use your available money to pay these first. Do not pay other people you owe money to (secondary creditors) until you have reached
an agreement with all of your priority creditors. Secondary creditors include:
- Unsecured loans
- Credit Cards
- Hire purchase agreements for non-essential goods
- Store cards
- Catalogue and mail order
- Repossessed house or car loans
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Helpful tips
You can solve your problems by contacting the people you owe money to or the many organisations willing to help you - so get advice now. Here are some tips that should help you get started.
- Get advice
- Don't panic or ignore the problem: unopened bills won't go away.
- You can't ignore your debts. Better to pay a small amount than nothing at all - those you owe money to may be prepared to accept low repayments.
- If struggling with store or credit cards stop using them.
- Work out a realistic budget that covers all your income and spending. Check whether there are any benefits or tax credits you are entitled to that you are not getting.
- Decide which debts take priority - like mortgage or rent - and which cost you most through penalties or higher interest rates.
- Only agree to pay off debts at a rate that you can keep up - don't offer more than you can afford.
- Contact those who you owe money to as soon as possible. Let them know that you are having problems. Many companies will be helpful if you talk to them.
- If organisations won't accept your repayment offers, seek advice.
- If you get a threatening letter get advice from your local Citizens Advice Bureau or trading standards service.
- If a debt collector calls at your home you don't have to let them in. If you want time to get advice arrange a later appointment. If a debt collector or lender harasses you contact your local Citizens Advice Bureau or trading standards service.
- Check if a loan will be secured on your home. If it is and you do not keep up repayments you could lose your home. If you do not understand the terms of a loan get advice.
- If you're thinking of taking out a new loan to pay off debts make sure you find out the total cost of the loan, not just the monthly repayments.
- Think very carefully before borrowing more to pay off your debts. Get impartial advice and don't rush into signing anything you don't understand.
- If you are thinking of using a fee-charging debt management company, then make sure you understand exactly what you are signing up to - check what fees you will be paying to a debt management company and how long it will take you to pay off your debts. Thousands of people in the UK are mistakenly advised to enter into debt management plans when they would be better off seeking alternative options.
- Keep copies of all letters you send and get about your debts.
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Debt restructuring. Options for those with serious debt problems
Debt Management Plans
What is a debt management plan?
A debt management plan is an informal arrangement with your creditors which allows you to make reduced repayments to your lenders (creditors) over a number of years.
Payments are made until the debt is cleared in full or until you are able to make the full repayments again.
The monthly repayments are based on what you can afford after a realistic income and expenditure has been drawn up.
*Creditors are not obliged to stop interest and charges with
informal debt management plans
What fees will I have to pay?
There
are various organisations to whom lenders and government
organisations will encourage you to contact in order to
enter into such an arrangement. These organisations will
receive monthly payments from you and make pro rata
distributions to your creditors for you. Some of these
organisations are registered charities that are funded by
the main lenders and some are privately owned. Despite some
of their claims, the services they provide are not
free of charge; just like an IVA (see below), their costs
are funded by your creditors.
| Advantages |
Disadvantages |
- You make payments that you can afford.
- Your payments can be reviewed every so often so that any changes to your situation can be taken into account.
- Can be used to tide you over until your financial situation improves.
- It can be drawn up by you.
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- They are not legally binding.
- Creditors are free to take whatever legal proceedings against you they wish at any time.
- It is common practice for creditors to continue to obtain county court judgments, a third party debt order or a charging order against a debtor’s property; even when they are making every effort to pay.
- Interest is not always frozen and, as you are in default, will continue to accrue at penal rates.
- You may never be rid of your debt.
- You must pay your creditors in full.
- It will be noted on your credit record
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How to set up your own self help debt management plan
Please contact us on our helpline 0800 043 3181 to find out more.
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Individual Voluntary Arrangements
What is an IVA?
An Individual Voluntary Arrangement is a legally binding agreement which is reached with creditors for the settlement of compromise of outstanding debts.
It is usual for the payment to be on deferred terms and for less then the full amount due (i.e. at a rate of pence in the pound).
Even though full repayment may not be made, once the agreement or arrangement is complete, the individual is exonerated from any balance outstanding. The slate is wiped clean.
The Individual Voluntary
Arrangement process is aimed at providing an alternative to bankruptcy. The costs are much less than bankruptcy and the process enables a greater return to creditors. In essence, a win / win situation.
Individual Voluntary Arrangements are not appropriate for all individuals. Therefore, before embarking on the procedure, you should ensure that you have sought independent and impartial advice from one of our experienced insolvency personnel.
In the case of an IVA, interest and other charges will only
be stopped if the agreement is agreed by 75%(by value) of
the creditors.
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What fees will I have to pay for an IVA?
You will be charged a fee equating to three
months voluntary contributions for drafting the IVA
proposals and dealing with your creditors. Thereafter, the
monthly payments that you make into your approved
arrangement will cover the payments to your creditors as
well as the insolvency practitioner’s fees for dealing with
the meeting of creditors and supervising the arrangement. In
short, the creditors agree that they will accept a lower
return from the arrangement.
What fees will I have to pay for a DMP
A typical fee will be the first three months payment that
you make and also an ongoing monthly management fee of 20%
to 25% of the payments you make
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| Advantages |
Disadvantages |
- You may only pay back a percentage of your debts.
- You only have to make one monthly payment or in some cases, a one-off lump sum.
- The Arrangement is legally binding so that your creditors cannot change their minds once they have agreed.
- Once the IVA is in place your creditors cannot bring any other action against you as long as you maintain your agreed monthly payment.
- You are able to operate a 'normal' bank account as long as it does not have an overdraft facility.
- No publicity in the local papers.
- It may safeguard your property.
- An IVA does not affect your professional status.
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- IVAs are only suitable if you or another person can afford to make an offer of repayment to your creditors.
- Your creditors have to agree on the arrangement through a vote. However we will not suggest this course of action to you unless we think there is a good chance that your creditors will accept your offer.
- If you do not make the payments to the IVA it is likely that the Arrangement will fail and your creditors will be able to take other action against you. It may also result in your bankruptcy.
- It will be noted on your credit record.
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What is the process for getting an IVA approved?
In every case, the first step is to assess whether an Individual Voluntary Arrangement is the most suitable solution for you. If we feel that it is not or you decide that it is not what you want to do, we will always suggest an appropriate alternative.
Once we have established that an IVA is appropriate, we will work together with you to determine how much you can realistically afford to pay into an arrangement. To do this we will need to ask you a number of questions about your financial situation. We will then discuss the figures with you and agree on a monthly repayment to your creditors. Alternatively, a one-off lump sum may be offered to creditors in full and final settlement of their claims; for example, by re-mortgaging your property. Other aspects of your financial situation will also be discussed such as the value of your assets. We will also need to ensure
that all your creditors (lenders) are included within the arrangement.
When your proposals are drawn up and you are happy with them, you will need to sign them and return them to us. In some cases we may make an application to court for an Interim Order. When this is in place your creditors cannot take any action against you
and we can hold a meeting so that your creditors can consider your proposals. If enough of your creditors
(75% in value of those creditors who vote) agree to your proposals the arrangement will become legally binding on them. All you then have to do is make the agreed payments. Once you have fulfilled the terms of your arrangement you will be free from your debts, even if you have only repaid a fraction of what is owed.
Where the arrangement is based on monthly contributions from your surplus income over a period of time we will conduct regular reviews of your income and expenditure during the arrangement. If during the period of your arrangement you find that you cannot meet the agreed payments we can ask your creditors if they will agree to vary the terms of your proposals. We want your arrangement to succeed and will do everything we can to help you through it.
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For specialist, confidential advice contact the Debt Solutions Helpline on 0800 043 3181.
We can assist you in drafting your proposals for an IVA. We have also produced a helpful leaflet for individuals in IVA’s who wish to make an early exit.
Bankruptcy
Bankruptcy is one way of dealing with debts you cannot pay.
The bankruptcy proceedings free you from overwhelming debts so you can make a fresh start, subject to some restrictions and make sure your assets are shared out fairly among your creditors.
Anyone can go bankrupt, including individual members of a partnership. There are different insolvency procedures for dealing with companies and for partnerships themselves.
The Insolvency Service, an Executive Agency of the Department of Trade & Industry, has produced a very informative “Guide to Bankruptcy” which may be accessed on their website at http://www.insolvency.gov.uk/pdfs/guidanceleafletspdf/guidetobankruptcy.pdf
For specialist, confidential advice contact the Debt Solutions Helpline on 0800 043 3181.
We have also produced a leaflet for bankrupts who need to secure an interest in a property from a Trustee in Bankruptcy.
Please note that the laws governing debt are different in Scotland.
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