What are the options when debts get out of control

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Sometimes we take on more than we can handle. When our debts get out of control, it's important to remember there are options available to you and there are services out there who exist to help you.

So what can happen if debts get out of control?

It is really important that as soon as you start to feel out of control, you should seek help and support before the situation gets serious.

The earlier you put your hand up and ask for help - often the easier the problem is to solve.

You may also find that there are things you can do with the companies you owe money to which can help you clear your debts and get yourself back on track. If you find yourself in serious debt, there are a number of charities that can help you – you can find some links and phone numbers at the bottom of this article.

It is important that you seek help and make sure you fully understand what you are entering into before agreeing to any type of debt arrangement or the consequences of any actions taken by your creditors against you.

What is a County Court Judgement?

Also known as a CCJ, this arrangement is a type of court order in England, Wales and Northern Ireland that may be registered against you if you fail to repay money you owe.

This won’t come out of the blue. Before this stage, the creditor must send you a warning letter, letting you know that you need to repay what you owe, otherwise legal action will start. The warning will be either a default notice or a letter before action, depending on the type of debt.

If you get one of these letters or notices get advice straight away so that you deal with the claim correctly, and the court can take your circumstances into account when they decide how you should repay the debt.

What is a Debt Relief Order?

Debt relief orders (DROs) are an arrangement that could be suitable if you are on a low income with few assets. Generally, it will freeze debt for a year to allow you the time to recover and work on a repayment plan. In more serious situations, the debt is written off completelty.

Once a Debt Relief Order is agreed, you make no further payments to the people you owe money to (your creditors). Your creditors are only likely to agree to a Debt Relief Order if it is unlikely that you will ever be able to clear your debts.

You can apply for a Debt Relief Order if:

  • you have qualifying debts of less than £20,000
  • you have £50 or less spare each month after paying your usual household bills
  • you don’t own things of value or have savings over £1,000
  • you don't own a car worth more than £1,000
  • you have lived, had a property or owned a business in the last three years in England, Wales or Northern Ireland
  • it's been at least 6 years since your last DRO and you aren't going through another process like bankruptcy or an individual voluntary arrangement

It's important to remember that a DRO will be noted on your credit file, so it's likely to make it difficult for you to secure a credit cards or any type of loan in the future.

What is an Individual Voluntary Arrangement?

An IVA freezes your debt, and then allows you to pay it back over a set period (usually 5 years). If you still owe money after this period passes then it could be written off. An IVA is managed by an IVA supervisor who will communicate with your creditors on your behalf. For an IVA to be approved, creditors who represent at least 75% of your debts must agree to it.

You can apply for an IVA if you can afford to pay something towards your debts but not necessarily the full amount that your creditors want.

An IVA is a legally binding agreement between you and the companies you owe money to. This means that once you’ve signed it, neither you nor your creditors can back out provided you continue to adhere to the terms of the arrangement.

So you need to make sure it’s right for you. You cannot take out more credit if you are in an IVA.

What does Bankruptcy mean?

Filing for bankruptcy writes off all of your debts. If you have any assets, they may be taken and used to pay off your debts. Bankruptcy is a debt solution for if you cannot pay your creditors when bills are due, or your total debts are bigger than the total value of your assets.

If you are made bankrupt, an Official Receiver or an Insolvency Practitioner will be appointed as a trustee. This person assess your income, outgoings and assets and decide how they can be used to meet your debts.

Your creditors will have to make a formal claim to the trustee for the money they are owed. You can’t make direct payments to them and they can’t ask you for payments.

After a period of time (usually one year), most of your outstanding debts are written off and you can make a fresh start. Until you are discharged from bankruptcy, or are still under other bankruptcy restrictions, you won’t be able to apply for credit of £500 or more without telling the lender about the bankruptcy.

Bankruptcy affects your credit rating and credit reference agencies can keep the details on file for 7 or 10 years, depending on the route the bankruptcy takes.

Bankruptcy is usually a last resort as once you are made bankrupt you are no longer in control of your assets, and it will have a serious impact on your credit rating.

Help and support

Here are some useful links and phone numbers for organisations and charities who can help you and provide advice if you are worried about your debt.

  • www.debtadvicefoundation.org - Debt Advice Foundation is a national debt advice and education charity offering free, confidential support and advice to anyone worried about debt - 0800 622 61 51

  • www.stepchange.org - Step Change Debt Charity provides you with the expert advice, budget support and solutions to help you manage your debts - 0800 138 1111

  • www.payplan.com - PayPlan’s online services include free, confidential online chat with debt help experts, a debt help request form, and a wealth of online resources - 0800 280 2816

  • www.citizensadvice.org.uk - Citizens Advice offers free, independent, confidential and impartial debt advice through their web chat service.

  • www.mymoneysteps.org - National Debtline offers free debt advice online through its My Money Steps tool and its web guides and fact sheets.

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