How to Deal With Debt Problems: Complete Guide

It all started small for me, 15 years down the line, I wish I would have said no when debt first creped slowly into my life. For my husband, I bet his problems started earlier. Personally, it initially started with a small catalogue debt of about £300 with an interest rate of 32% APR.

As for My husband, his debt was a result of small credit accumulating to one huge debt. Credits card debts, car loan, and later some consolidation loan, and we already had the perfect recipe for a debt trap. The most unusual thing about all these is that no one even had any idea of the extent until later when we were signing our first mortgage, and that was it, really did hit home.

Deal With Debt Problems When You Lost Your Job?

Just after we moved in, my now husband lost his job and we couldn’t keep up with the credit card repayments. Back then, we had our own bank accounts so I didn’t know how much my husband was actually paying towards his debt and I don’t think he knew either!

When my husband lost his job in 2003, the reality of debts hit us. At this time, the total debts exceeded £35000, not including our mortgage. We told our close family and friends and they really understood, telling us not to bother buying Christmas presents and coming round to our house for nights in.

It was during these times that we opted for professional help, and here we are “said Mary, as he sipped the cup of tea provided. Stories similar to Mary’s, are on the rise. People are being bogged down by debt so deep, that bankruptcy seems to be their only way out.

According to financial education Charity Credit Action, the average UK household debt is £57,888, including mortgages. That’s a lot of money owed by the British people and debt education should be made more available. But why do people end up in debt? What are some ways out? What is the debt in the first place?

Are You in Debt?

If someone asked you ‘Are you in debt?’ – Apart from possibly being slightly put out by the personal nature of the question – how you answer will probably depend on how you view the word ‘debt’.

Strictly speaking, a debt is something (usually money) that has to be repaid to the person/organization that loaned it to you in the first place, normally with some additional cost for the privilege. By this definition anyone who uses an overdraft on their bank account, has a mortgage or who owes their mate £20 because they forgot to take any cash to the pub last Friday has debt.

In this day and age, it is almost impossible to live debt-free. Let’s be honest, most of us can’t pay cash for our homes or our university educations. So if you want to achieve these things, it is likely that credit can help you.

Debts, such as a student loan or a mortgage, which help you achieve a very specific positive aim, are normally the best kind of credit. Generally, they have lower interest rates than other debts. And they can actually help you accumulate money in the long term, by taking advantage of rising property prices or by securing you a higher paid job when you graduate.

Dealing With Debts Solutions

If you owe people money to your creditors, you can make arrangements to repay your debts. Your options depend on the amount of money and assets you have.

You can pay your debts in installments by setting up:

  • A Debt Management Plan                                                           

A debt management plan (DMP) helps you to manage your debts and pay them off at a affordable rate by making reduced monthly payments. DMPs from majority of the debt companies are usually free. The largest benefits on this particular method is, that you only make payments that you can only afford. In fact, the payments are usually an overflow of your monthly budget.

  • An Administration Order

An administrative order is a legal debt settlement that sets out a repayment plan. This form of debt solution will consider the income you have remaining after your essential bills and living expenses have been accounted for. In the majority of cases, it is usually handed on debts less than £5000.

Once agreed, your creditors won’t be able to chase you for any additional payments outside of the debt settlement schedule, nor will they be able to add any further interest or charges.

This solution is only available for England, Wales, and Northern Ireland Residents only, as the Scottish have different version of it.

  • An Individual Voluntary Arrangement

An IVA is an agreement that is made with your creditors to repay your debts over a set period of time and is one option you can use to pay off your debts. It is a formal, legal debt solution. This means it is approved by the court and your creditors have to stick to it. It’s usually carried out by an insolvency practitioner. IVAs are a different form of bankruptcy and sometimes they do tend to be more expensive as you may be required to pay both the practitioners and the agreement fees.

Other debt control methods, may include filling for a Debt Relief Order or applying for bankruptcy. These methods can only be considered if you really can’t afford your debts or your assets are too negligible to help you with the debt.

In Scotland, you can arrange a Debt Payment Programed from the Debt Arrangement Scheme. Another option may include trying making an informal agreement with your lenders, though it’s highly discouraged as there’s no guarantee.

Debt Relief Order (DRO)

A debt relief order (DRO) is one way to deal with your debts if you don’t own your own home, don’t have much spare income, and your debts are £20,000 or less. Some types of debt don’t count towards this limit, so check whether you’re eligible before you decide.

KEY NOTES ABOUT DRO: 

While a DRO is in force:

  • You don’t have to make payments towards most types of debt included in your DRO
  • Your creditors can’t force you to pay off the debts.

At the end of the DRO period, usually around a year:

  • Your debts will be written off
  • You are still responsible for paying off any that aren’t included in the DRO – this is because DROs don’t cover all debts.

Can my debt simply be written off?

While this may sound a little reassuring, I mean, its everyone dream to be informed by their creditors that they no longer possess any credit. This may be difficult though, as most creditors are profit-minded, and writing that debt off, may not be a smart move for a profit-making company.

In most cases, they will have to evaluate all other options first. You also have to show that it’s in both of your interests that the debts should be written off. Considering the above it is not as easy as it looks, but its advantages may make it worth it. Some of them may include:

  • All stress, burden from lenders will be lifted off you
  • Any debt recovery actions shall cease henceforth;
  • Stress and anxiety are reduced; and
  • You can make a fresh start.

Most lenders will consider writing off if they figure out, that you are in a dire situation, and pursuing further for their loans may be less productive, this is usually the case with small amounts. In some cases, though not frequent, due to legal implications, some lenders may decide not to recover any of their debts, and cease pursuing for their credit.

If your debts are owed jointly with another person, the creditor might agree to write off your liability for the debt but still pursue the other person for the whole amount. To avoid this, try to get a write-off agreement that includes everyone in the agreement.

Situations that May Warrant for Debt Write off

Some situations may not even be worthwhile for debt recovery companies. This situation that, may warrant for debt write off may include:

  • Your home is due for rent, have no over-surplus income (barely on the minimum wage) especially after covering your basic needs, and have no savings and little or no assets, worth of a sale.
  • You have been diagnosed with a terminal illness, or you have long-term health issues, you may have gotten a disability, which may affect your prospects of getting a job.
  • Your only source of income is through a government help scheme, or you’re in need of a career since you barely can manage by yourself
  • Your main source of income is through pension, you are almost to retire, your only source of income is through the benefit income or you are on a limited based income.
  • Depending on your situation and circumstances, there are less or zero chances of you making any significant payments to your creditors, either at that time or in a few years. Your situation may get worse in the long run
  • After consultations with other lenders, they too have decided to write off their debts.
  • The person in question is dead and left less or nil assets, cash or any property for either family or friends

In these situations the creditor may accept that it is not in their interest to pursue recovery of the debt. You can also point out that if the creditor applied for a court order the court is likely to accept that you can only pay a token amount, for example £1 a month. It is unlikely to be worth employing a debt collector to try to recover the debt, as it may cost the creditor more to pay the debt collection agency than they get back.

Debt Charity or Financial Help with Debt Charity

Charitable payment – if you require financial help or advice, then this is the best one stop shop for you. Most debt charities don’t have any limit of debts to require help from them, from large to small debts; they mostly serve everyone in distress.

They tend to prioritize debts i.e. dealing with the highest creditor owned to the least owned. Most instances, they listen, advice, and if need be, can contact your creditors for an agreement on how your debt will be repaid.

Some of their Advantages may include

  • It relieves stress and anxiety where you are in an exceptionally difficult situation.
  • A charitable payment may pay off a particularly urgent or pressing debt.

Disadvantages

  • Most charities are unlikely to be able to help with large credit debts.
  • You must fit the charity rules to apply in the first place, so it may be hard to find a suitable charity.
  • Charities are only likely to help with an emergency or priority debt, not the whole problem (assuming you have more than one debt).
  • You will normally have to fill in a detailed application form or find an advice agency to apply for you.

Overall Management of Debts

Just like a disease that can suddenly take over our lives, and limit our happiness, debt can be a deadly disease if not checked up. Do not let this be the case, instead take back your life.

Just imagine life without the debts. This can be a reality, if only you’re disciplined and have the will to tackle this menace.

Some advice on dealing with credit is

  • First tally up your debts

Before taking any pre-thought steps, you need to carefully calculate and evaluate all credit that you owe. This is primarily done to give you an overview of your situation and also have an idea on how to cope with it

  • Stop acquiring new debt.

This may be difficult, especially if your deeply bogged down by debt, but you should find a way of not using your credit card. Anything you can’t afford, and isn’t essential, simply avoid buying it, because just like some experts claim, using the credit card is similar as borrowing from the future. No one wants to have a broke future, and with the credit card, that’s where it all starts.

  • Get help

If your debts are out of control or you are really struggling to make ends meet, it’s important to act quickly. Here are some places you can go for free help and guidance.

Financial counseling –A free service offered by community organizations, legal centers and some government agencies that can help you solve your money problems.

A free service offered by community organizations, legal centers and some government agencies that can help you solve your money problems.

Free legal advice – If you are in debt and have legal problems, community legal centers and Legal Aid agencies offer free legal advice in every state and territory.

  • Draw up a budget

Drawing up a budget is the only way to make stay on top of your finances by making sure your money goes where you want it to. It’s not about depriving yourself – it’s about being in control. You should also make your budget as realistic and achievable as possible. If it’s neither of this, then you will obviously not stick to it.

  • Prioritize your debts

Some debts are more important than others. These are called priority debts. It is important to use your money for creditors to make agreements to settle these debts first. Depending on how much and what type of debt you have, there could be a couple of options open to you. You could start by:

  • Paying off the debt with the highest interest rate first; or
  • Paying off the smallest debt first (so you feel a sense of achievement).

Regardless of what you focus on first, make sure you continue to make at least the minimum repayments on all of your debts to avoid any late payment or default fees.

  • Consider either the option of debt consolidation or re-financing

The idea of paying someone to assist you with your credit problems may sound a little bit enticing, together with the idea of combining all our credit into one big pile. These decisions may only be taken, after carefully evaluating all other available options. If you still arrive to the conclusion, then you may need to verify from a debt professional such as a debt councilor.

Consolidating or refinancing loans can work for some people if it means they pay less in fees and interest. For others, it may only be a short-term fix, especially if they can’t meet the repayments on the new loan.


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