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How to get out of Debt

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How to get out of Debt

Very little in life compares to that feeling of being overwhelmed with stacks of credit card bills, overdrafts, short-term loans, personal loans, mortgages and debts which we have no way of paying. Maybe we have just recently lost our job, or we have just had a massive expense which has cleaned out our savings to the point that our funds are now exhausted.

You find yourself unable to sleep, feeling stressed out with worry about how you are going to put food on the table and get to work the next day is not a nice position to be in.

No one wants bailiffs at the door, and final demands and collection notices coming through the post, but before you lose all hope there are options out there which could help you if you are struggling with debt problems.

The options we will go through, some can be carried out by yourself whereas some others will require the help of a third party and in some extremes case you might find yourself having to turn to the courts if you wanted to go down the bankruptcy route.

The choices that are available to you are down to the amount of debt which you have, for example declaring bankruptcy for the sake of £500 of debt is overkill, but not if you are a million in debt.

Another factor to the options available will be the amount of money you can afford to repay at the end of each month.

Also, it can depend on the type of assets you currently have, do you own your own house, or other property, an expensive car or such like.

All the above can dictate the route you could take to resolve your debt problems.

So, Let’s now take look at what options you have available if you are struggling with debts.

Token Payment Arrangement 

A token payment arrangement is where you will agree with your creditor/s a revised repayment plan which you can afford. The repayment could be any thing from £5 and up, but this is something you would need to arrange with your creditor/s

You can also ask your creditors to freeze your account so that it no longer incurs interest or changes. Although this is completely at the discretion of the lender and they are under no obligation to do so, it would be a goodwill gesture so ensure that you always keep in contact with your lender if suddenly find yourself struggling to repay your debts.

You can either contact the creditor yourself or you could contact a debt management service who will sit with you to help you organise all your income and outgoings and arrange a payment plan with each of your creditors. We will discuss this in the next section.

Most lenders will generally accept the smaller repayments. Although they may in the future come to you for a larger sum of money to pay down the outstanding debt.

It is a good idea to continue to save as much money as you possibly can so if they do come demanding a larger payment you will at least have something to pay.

This arrangement is something you can do own your own or through the assistance of a third party such as your local Citizen’s Advice Bureau.

Debt Management Plan

Similar to a Token Payment, a Debt Management Plan is a service provided by companies for small monthly fee where they will help you create a plan to repay your outstanding debts.

Just like in the token payments, the debt management service will request the creditor to freeze the account so that you are not charged any additional interest or charges.

They will work with you to create a comprehensive list of your income, wages, benefits, tax credits along with your monthly outgoings, council tax, gas, electricity, travel, food, etc.

At the end of the process, any surplus that you have after all your monthly expenses are taken into account will be distributed on a pro-rate basis to all the creditors.

Unlike the Token Payments, many creditors will work with this plan provided it is documented and that they can see exactly what you can afford. They are more likely to work with you if the forms have been completed by a debt management company.

Although this path means that you have now effectively gotten your debts under control it could be years before some of the debts are repaid.

IVA/Individual Voluntary Arrangement

IVA are like debt management plans although they are more official.

First of all, and IVA is set up and handled by Insolvency Practitioners who will charge fees for their services.

Like the debt management plan, you will agree through the Insolvency Practitioner to repay your creditors how ever much you are able to afford each month.

Also like the debt management plan you will create a detailed list of your income and your outgoings on an “income and expenditure form”

You are required to pay into the IVA for five years and at the end of any remaining balances are written off.

As an IVA is a formal arrangement it has to be voted on by the majority of your creditors and all creditors are bound to it for the 5 years.

Just like with the debt management plan the Insolvency Practitioner will arrange for the creditor accounts to be frozen to all interest and charges.

Any fees charged by the Insolvency Practitioner will be included as part of the payback to the creditors, so most Insolvency Practitioners do not charge any upfront fees for their services to set up an IVA. 

Administration Order

If you have debts of 5k or less and no assets like a car or property you could request for the courts assistance in setting up a repayment plan for you. Just like a debt management plan the courts will allow you to pay your creditors what you can afford and your creditors will have to accept the terms of the Administration Order and the payments.

Debt Relief Orders

If you have debts of less than 15k and no asset with no more than £50 of extra cash each month after all other allow living expenses (Gym membership is out of the question) you can apply through the courts for a Debt Relief Order or simply a DRO.

DRO’s are a type of insolvency like bankruptcy for debts less than 15k and is less expensive than bankruptcy and faster to process.

Bankruptcy

Bankruptcy can be for any amount of debt, although probably not the best idea for smaller debts under 15k if you have no assets or any additional cash at the end of the month then a Debt Relief Order might be a better option.

If you do decide to go down the bankruptcy path an Official Receiver (OR) or Trustee will be assigned to you and they will assess your situation.

Any surplus of cash which exceeds £20 per month you will need to pay into the bankruptcy for 3 years.

If you own assets like property and you decide to go bankrupt the OR might decide that any equity in the property to be paid into the bankruptcy

Bankruptcy is the ultimate and extreme way to be relived of your debts. Although it does mean that you are now free of your debts and can begin from fresh.

Debt management agencies are regulated by The Financial Conduct Authority

Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.

https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk

You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk