Ways out of debt
If you're struggling with debts, they may seem impossible to manage. However, there are ways to get out of debt, no matter how bad the situation seems. And there's plenty of free advice available to help you.
Facing up to your debt problem
Almost everyone owes money - bills are a fact of life. But sometimes you may find you're swamped with debts and can't see a way of paying them all. The worst thing you can do is to ignore the problem - it won't just go away.
Making the most of your money
If you're in debt, work out a realistic personal budget so you know where your money's going -and how much you can afford to pay those you owe money to.
If you don't have enough to pay off your debts, look at ways of cutting your costs and increasing your income.
Cutting your costs
You can look at your expenses to see where you can make savings.
You could also try shopping around to reduce bills, or think about selling non-essential items that you own (for example, a second car).
Increasing your income
You may be in debt because you're not receiving all the money you're entitled to.
For example, it's advisable to:
- make sure you're not paying too much tax
- check whether you're entitled to tax credits
- ensure you're receiving the benefits you're entitled to
- make sure that any family and friends living with you are paying enough towards household expenses
- think about renting out a spare room to a lodger
- check whether your mortgage payments are covered by insurance
- Read more about increasing your income from National Debtline
Consolidating your debts
If you're thinking about taking out a single loan to pay off all your existing debts, make sure you're not simply taking on more debt. Check that the terms of the loan aren't too harsh the interest rates and the length of the loan, for example. Be very careful about taking out a loan secured on your house as it will put your home at risk.
It's always advisable to seek independent advice before taking out any kind of loan.
Coming to arrangements with creditors
Once you've sorted out your personal budget, you can start to make arrangements with your creditors (the people you owe money to) about how much to pay. There are several options:
If you know you can't pay all your debts, its important to prioritise them.
Write to your creditors to see if you can agree on how to pay back your debts at amounts you can afford. Use a a personal budget sheet to help you.
An informal arrangement isn't legally binding, so your creditors could ignore it later and ask you to pay in full.
Debt Management Companies (DMCs)
DMCs offer help if you're in debt (they usually only deal with non-priority debts - see the link 'Find out more about non-priority debts' below). They negotiate with your creditors on your behalf to reduce the payments you are making overall. You then make one payment to the DMC, which distributes it to the creditors.
Some DMCs are paid commission by creditors so are free to you. However, most DMCs charge a fee, so you may have less money from your available income to settle your debts.
Many organisations, such as the National Debtline, offer free debt management plans, so there is no need to use a commercial service.
Individual Voluntary Arrangements (IVAs)
If you can'twork out an informal arrangement, you can apply to court for an Individual Voluntary Arrangement (IVA). This is where you formally agree to pay part, or all, of your debts over a period of time (typically five years).
You'll need an insolvency practitioner to set up the agreement, and there are certain conditions that apply - see below for details. Bear in mind that IVAs take several months to organise, and you may have to pay a large administration fee.
If one or more of your creditors has obtained a County Court Judgment (CCJ) against you, the county court could make an administration order telling you to make regular payments, which the court will pass on to your creditors.
An order will only be issued if you have enough regular income to meet the repayments and your total debts are less than 5,000. Repayments can be as little as 5 per month if that is all you can afford. You can apply for an order to be changed if you have difficulty keeping up the payments.
You can apply for a Debt Relief Order (DRO) from April 2009. You must apply to the official receiver on a special online application form, with the help of a money adviser who has been appointed as an approved intermediary.
To find out more and to see if you are eligible follow the link below.
When you're declared bankrupt, an administrator uses your assets (property and possessions) to pay off your creditors.
More useful links
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