Your Guide To Dealing With A Debt Crisis
Am I in Debt Crisis?
Are struggling to pay all your basic outgoings like rent or your mortgage,energy bills and credit card minimums
Your debts (excluding any mortgage) are higher than your after-tax income for a year
Then you are likely to be in debt crisis. However, it is possible to have high levels of debt and still be able to service them. If you can do this, even at the minimum level, you may have debt worries, but are not truly in debt crisis.
The reason why it is important to determine whether or not you are in debt crisis or just have debt worries is that if you are truly in debt crisis, a different solution may ultimately apply.
What Should I do if I am in Debt Crisis?
If you have determined that you are in debt crisis – don’t panic. Though calling it a ‘crisis’ makes it sound scary, there is always a way through your current difficulty.
The word ‘crisis’ is most commonly used today to mean a period of intense difficulty or danger, or a ‘decisive point’, when a difficult or decisive decision must be made. Originally, however, the word denoted the turning point of a disease, from the Greek krisis ‘decision’. It could be a dangerous moment, but it could also be the point at which someone could turn the corner and begin to get better.
You can think about your debt crisis as the turning point for you. By coming to this page, you have already taken the first step in getting better, and improving your difficult financial situation. While no debt solution will solve all your problems overnight, beginning to tackle your debt problem, even in a small way, can make you feel a whole lot better.
The ‘nuclear option’ of bankruptcy is rare. Even if you do ultimately have to take that route, it may not be as dire as you think. No matter how bad your money situation has become, there is always a light at the end of the tunnel, as long as you are prepared to work towards a solution. Admitting that there is a problem and facing reality is an important first step on the road to good financial health.
The Debt Checklist:
First of all, it can be helpful to run through a debt help checklist. This checklist is primarily designed to help you avoid getting into a debt crisis in the first place. But even if you are already there, it could throw up something of use and stop things from spiralling even more out of control. The checklist could help you begin to meet your minimum outgoings and at very least stop things from getting any worse.
Sort out Your Spending
The first stage in debt management is working out how the debt amounted in the first place. It is important to recognise that there is a difference between weighing up your options and taking a calculated decision to take out a loan or get a credit card for a particular, important purchase, and just ending up amounting debt though overspending in your daily life. Determine whether or not you are living within your means and determine how bad your debt really is.
- Think about how you might be able to reduce the cost of your accommodation. Have you got the best deal on your mortgage, are you paying over the odds for rent? Is relocation an option or do you have to stay where you are? Could you return to live with parents, or live with other friends or relations until you recover your financial position? Could downsizing be an answer?
- Wherever you live, give your home an energy overhaul and think about ways to lower the cost of gas and electricity. Compare prices on utilities and make sure you sign up with the companies that offer you the best deals.
- Food can be a major expense. Consider saving money by growing at least some of your own food in your garden, a community garden, an allotment, or even on a sunny windowsill. Buy fresh produce, prepare meals from scratch and buy staples in bulk to save money. Avoid eating out and dine instead on healthy food at home.
- Save costs on cleaning and beauty products by making your own using cheap, natural ingredients.
- Be a savvy shopper and buy only clothing, and other items, that you really need. Compare to find the best deals on those things you really need, consider second hand items. Reduce, reuse and recycle. Learn skills and make do and mend, consider making your own rather than buying things new.
- Save on travel by walking or cycling where you can. Consider car share and take other measures to save fuel if you are driving. Consider whether public transport might be a cheaper option than running your own vehicle.
- Rather than spending on entertainment, think about all the things you can do for free. Take up new hobbies, take a walk, visit free museums and historic attractions… enjoy the wonders of the natural world.
Once you have worked out where your money is going, and taken steps to reduce your spending, you can make a budget. Making a budget and sticking to it will help you move towards getting back in the black.
Increase Your Income
As well as reducing spending, getting out of debt could also involve looking at ways to bring in a little extra each month. Whether or not you are employed full time, you may be able to look at getting work in the gig economy on the side – perhaps writing or creative work online, perhaps some other casual work. It could also be worthwhile asking for a raise at your current workplace, or looking into monetising a hobby or becoming an entrepreneur.
Even if you cannot increase your income from the work that you do, or cannot find a job, there may still be other ways to increase the money that goes in as well as reducing the money that goes out.
Make Sure You Are Getting Benefits To Which You Are Entitled
One source of income might be benefits. It is vitally important to make sure that you are getting all the benefits to which you are entitled. If your family income is under £73,000, you may well be entitled to some form of benefit. Benefits are not only for those who are out of work, so it is always a good idea to make sure you are aware of which benefits are out there, and take advantage of and apply for any that are relevant for you.
Look Into Whether You Can Get Help to Pay Your Mortgage
You may be able to take advantage of a government scheme which helps those who are struggling to make mortgage payments and who are in arrears by paying the interest (and only the interest) on the mortgage up to a certain threshold.
Reclaim Mis-sold Payment Protection Insurance, Bank Charges and Get Council Tax Rebate
If you have been mis-sold payment protection insurance, if you have not already done so, you should make sure that you claim the money back. You may be able to recoup thousands of pounds!
If you have incurred bank or credit card charges for going over your limits, you may be able to get the cash back.
You may be one of 400,000 homes in the UK paying too much for council tax or, if you wear a uniform for work, you may have paid too much income tax and may be entitled to uniform tax rebates.
Lower the Cost of Your Debt
Check your credit report
The state of your credit report will determine whether or not many of the options below are available to you. You can check your credit report for free.
Shift debts to a cheaper credit card
Those whose credit ratings are high enough could consider applying for a credit card with a good deal. If used correctly and with discipline, credit cards can be one of the cheapest ways of borrowing. It is possible to get long-term balance transfer borrowing on a credit card for 0% and even with a somewhat iffy credit score, attainable deals are still out there.
Cut credit card costs without new credit
You do not necessarily need new credit to cut credit card costs. Many credit cards allow customers to move other debts to them at special rates. Using a ‘credit card shuffle’ technique, it can be possible to create substantial savings.
Check for utilities grants and support
Some gas and electricity companies offer help to those who have racked up large arrears on their fuel bills. Contact your energy company to see whether they run such as scheme and whether they can help. Water providers may also have similar schemes.
Get an affordable personal loan
A personal loan may be competitive with the cheapest credit cards. If you can get credit, there are a range of cheap loans out there that could help you to consolidate your debt. You may struggle to get a loan with bad credit, but may still be able to consider joining a credit union. Credit unions are co-operatives set up and locally-run to assist people who may not otherwise have access to financial products and services.
Consider remortgaging deals
You may be able to consider lumping other debts in with your mortgage on a good remortgage deal. However, it is worthwhile remembering that while interest payments may be lower, this is a secured debt, not an unsecured one, and you will risk losing your home if you cannot make your repayments.
Always use savings to pay off debt
The mathematics of a high rate of interest charged for borrowing and a low rate of interest paid to savers means that it is almost always better to pay off your debt before saving up. Begin by paying off the debts with the highest cost before moving on to other debts that cost you less.
If you have worked through this checklist, curtailed spending as much as possible, looked into all potential sources of income or one off sources of cash, and followed the above steps to reduce the cost of your debt and still cannot manage, then it may be time to take more drastic action.
Talk to your Lender
If you think you are going to be unable to make a payment, talk to your lender. It is always better to talk to your lender and keep them informed rather than just defaulting.
Look Into Government Help
There are a few government schemes that could provide you with interest free borrowing to help you avoid incurring more commercial debt.
Local council support schemes sometimes help out residents within their area who are in an emergency situation. You could consider approaching your local authority to find out whether any such schemes in your area could help you.
If you are in extreme hardship and need urgent help and cannot get any funds from any other sources, you may also be able to apply for a budgeting loan or advance from the Jobcentre. Unfortunately, there is not an unlimited pot and austerity policies mean that demand is extremely high, so you may not get anything. Still, it is worth a try.
Free Debt Counselling:
Those in a debt crisis can get free one-on-one help and advice to help them work out the best way through their situation. Make sure that you contact a non-profit, who will be there to help you not make money out of your hardship. As well as talking through your situation, non-profit debt counsellors will also be able to help if you are being harassed by debt collectors. If you seek debt help, debt collectors are not allowed to contact you for 30 days due to an agreement reached between the government and the Credit Services Association.
- Citizen’s Advice (Visit your nearest CA centre)
- StepChange Debt Charity (0800 138 1111)
- National Debtline (0808 808 4000)
- Christians Against Poverty
- Civil Legal Advice
- Debt Advice Foundation
- Debt Support Trust
- Business Debtline
How Can Debt Counsellors Help?
- Negotiating with creditors to freeze interest on your debts.
- Place you on a debt management plan (DMP) which they negotiate with your creditors.
- Point you towards formal debt solutions such as IVAs, debt relief orders or even bankruptcy. (More on these formal debt solutions can be found below.)
Remember, a debt counsellor is not there to judge you or tell you off. They will simply help you talk through the problems and work towards a solution.
Formal Debt Solutions:
If you are truly in a debt crisis then you may well need to move to more formal debt solutions. Let’s begin by looking at what each of these is, what they mean and how they could help solve the situation:
Debt Management Plans (DMPs)
A debt management plan is an agreement between you and the companies to whom you owe money. You make payments to a licensed debt management company, who then shares out this money between your creditors. This is the least serious formal solution to your debt and does not go through the courts.
DMPs rely on your having the money to pay creditors, and for them to accept that they will get their money over a longer period than that agreed when you took on the debt. DMPs are not legally binding, but they also do not involve writing off any of your debt. They can be used for all unsecured debts, though not mortgages or any other secured ones.
Debt counsellors will arrange a DMP for you for free – do not be conned into paying a private company for this service. Since you will make just one monthly payment, this can take the stress out of your dealings with those you owe money to.
If you live in England, Wales or Northern Ireland and have a court judgement against you which you cannot pay in full, an administration order is a way to sort out this debt problem. An administration order is a repayment plan arranged by your local county court, and is a potential solution for debts of less than £5,000.
You will have to have at least two creditors, and be able to make a monthly payment to the local court which will be shared between them. There is no upfront fee to set up an administration order but the court will take a handling fee of 10p out of every £1 you owe (to a maximum of £500).
An administration order will last until you have paid off your debts in full. However, if you can only afford to pay a small amount towards your debts you can apply for a ‘composition order’ which costs £15. This sets an end date for the order to end and once this date has been reached any debt remaining will be written off. Courts will consider this if payments will not clear the debts in a reasonable amount of time.
In Scotland, there are other ways to manage debt, such as Debt Arrangement Schemes (DAS).
Debt Relief Orders (DRO)
A debt relief order is for those who are on low incomes and who have debts of under £20,000. A DRO will put a halt on all repayments and interest for twelve months. After this time, your situation will be re-evaluated and if you are still in a dire financial situation and things have not changed, your debts will then be written off.
To apply for a DRO you must not have property, savings, a car, shares or any other assets worth more than £1,000 and, after living expenses, cannot have more than £50 left over from your incomes/benefits each month.
DROs are granted by the Insolvency Service and are a cheaper option than going bankrupt. You will need to pay a fee of £90. While most debts will be included in a DRO, certain things, including court fines, child support payments, student loans and social fund loans will still have to be paid. The DRO will be published on the Individual Insolvency Register, which is made public. It will remain there for 15 months.
Individual Voluntary Arrangements (IVAs)
This is a legally binding agreement that usually lasts for five or six years. All the debts that you currently owe will be combined into one monthly payment, to be distributed between those to whom you owe money. In this respect, it is identical to a debt management plan. An IVA, however, differs in that it will have an end point, after which the remaining debts will be written off and you get to start fresh.
You cannot set up one of these on your own. You require the services of an Insolvency Practitioner. You can end up paying between £5,000 and £8,000 for an IVA. Any amount of debt can be included in an IVA but usually one will only be agreed to when debts total more than £10,000. To be accepted, you will have to have a stable income as you pay towards your debts during the term of the IVA. The advantage over bankruptcy is that you will usually be able to keep your car and home (though you will probably have to remortgage to release equity). Only certain debts can be included in an IVA. You can talk it all through with a debt counsellor to find out whether or not an IVA is right for your specific situation.
(The nearest equivalent in Scotland is a ‘trust deed’.)
If you are declared bankrupt, you will not be able to:
- Borrow more than £500 without telling the lender you are bankrupt.
- Act as the director of a company.
- Create, manage or promote a company without the court’s permission.
- Manage a business with a different name while not telling people you are bankrupt.
- Work as an insolvency practitioner.
Restrictions are in place for 12 months after you are declared bankrupt.
Bankruptcy involves selling any assets you own, including your home, vehicle, and any other expensive possessions and paying off as much of your debt as you possibly can. If you rent, make sure that your tenancy agreement would allow you to continue to live there. Some landlords will not let to people who have been declared bankrupt.
While this is an extreme solution, it is not the end of the world. After 12 months you will no longer be deemed bankrupt, and can move on with your life.
Debt is never easy and of course it is always better to try to avoid going into debt in the first place, or only borrowing responsibly and within your means. However, if you have got into a difficult situation, you are not the first and you will not be the last. Rather than beating yourself up about it, take positive steps to begin to get out of the situation.
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