It’s easy to get into debt. Dipping into your overdraft or buying something on a credit card seems surprisingly simple, but getting back out of debt is usually significantly harder. Once you’re in debt, you might find that you struggle to keep up with repayments.
Debt Management covers various solutions to help you get out of debt you can't afford. A Debt Management Plan is an informal agreement. An IVA is a formalised 5 or 6 year plan. Or in certain circumstances, you may go bankrupt.
If you’re in debt, you can choose from several different debt management solutions from a Debt Management Plan through to bankruptcy. You also have the option to manage debt on your own.
Managing your debt is essential to your financial wellbeing, as well as your mental (and sometimes physical) health.
Read on to learn more about debt management and how you can get out of debt.
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Anyone can manage their own debt. You need to make sure that you’re sticking to agreements that you made with your creditors. In some cases, sticking to your agreement will make sure that your debt is paid off. In other cases, making minimum payments will just keep your debt at the same level.
If you’re in debt, the solution is simple on the surface. You need to pay back what you owe, and you might need to increase your income or decrease your expenditure for this to be possible.
If your current financial situation isn’t working, can you bring it some extra cash?
If you need to consider debt management, you certainly aren’t alone. The debt charity StepChange reported that, in 2019, over 635,000 people got in touch to discuss their problem debt to find a debt management solution – the equivalent of one new client every 49 seconds.
Three-quarters of those new clients blamed their issues on a life event or income shocks such as redundancy or suddenly reduced income. 52% of clients are in the 25-39-year-old age group.
Increasing your income is one way to start chiselling away at your debt. You can do this by looking for a job that’s better paid if you want a long-term solution. You can take on more hours if you’re paid by the hour, or ask your employer about their paid overtime options. There are several ways to make more money just from the work you do already.
If getting more money from your existing job isn’t possible, you might like to look into options like taking on an extra part-time job. Even a few hours a day could give your bank balance the boost it needs to start getting out of debt.
One-off ways to increase your income can also help you pay back what you owe. Look for things you own that you could sell in used condition, then use the cash to bring down your debt. If you have spare time, even online surveys can bring in a small amount of cash.
There are two ways to get hold of more money for your debt accounts. If increasing your income isn’t right for you, look at reducing your expenditure. Ideally, you’ll do both to maximise your spare cash opportunities.
Reduce your expenditure by spending some time going over your household budget. Be realistic, so you won’t leave yourself short of money. Be honest with yourself about those small costs that quickly mount up.
Good ways to make changes include switching energy providers and cancelling subscriptions you don’t use. Many people have at least one subscription that they’re not using as they should.
Creditors have to make sure that they’re lending responsibly. If you’re struggling, contact your lender might have surprising results. Lenders may discuss your income and expenditure, and might ask to see a copy of your budget, but maybe willing to create a new payment plan or freeze your interest temporarily.
If a creditor agrees to reduce your payments, your debt might be easier to manage. Be aware that this usually means you’ll end up in debt for even longer.
If managing your debt leaves you feeling more stressed, debt consolidation loans can help. You’ll apply for one large loan that covers your other debts, then use the loan to pay off any debts that you’re holding elsewhere. Now, you’re left with just one loan and only one monthly payment.
A debt consolidation loan can help with debt management if you’re struggling to manage several payments. Sometimes debt consolidation makes each month more affordable, but you’ll probably end up in more debt overall.
Debt consolidation can be cheaper or may end up much more expensive, so take some time to check interest rates and charges before you choose to go down this route.
The first of your more formal debt management solutions, a Debt Management Plan is like a managed debt consolidation loan. These are typically offered by debt charities, who’ll work with all your creditors and work as a go-between.
Your chosen debt charity will check your budget. They’ll decide how much you can realistically afford to put into your debts every month. You’ll stop dealing with your creditors, instead of paying into your chosen debt charity who’ll split the money and pass it on to lenders. Many lenders will freeze interest when a Debt Management Plan is in place.
It can take a long time to clear your debts when you use a Debt Management Plan, but you’ll be more comfortable because you’re only paying what you can afford.
If you have very little money left over each month, you might want a Debt Relief Order. With this, your debts are frozen for 12 months to see if you can get back on track.
If you can’t make a significant change to your financial situation, the Debt Relief Order will write off your debts at the end of the 12 month period. This is a form of insolvency, so your name will appear on the public insolvency register. Understandably, this option will also really damage your credit score.
An IVA is another form of insolvency. With this, you pay as much as you can, through a one-off payment or by making monthly payments over an agreed term length. Most people make payments under IVAs for between 5-10 years.
When you reach the end of your term, creditors agree to wipe any remaining debts.
If your financial situation is particularly bad, you might want to file for bankruptcy. This is the last resort and could lead to you losing your property. You might lose your house or your car, and will also destroy your credit file whilst being placed on insolvency registers.
With bankruptcy, your debts are written off. There are fees involved, so you’ll need the money to pay for the legal costs upfront. Almost all debts are included, though some like TV license debts must still be paid back separately. Bankruptcy may affect your job and is especially likely to if you work in a legal or financial career.
The great thing about addressing your debt is that things are going to get more comfortable. As you start to make repayments and your debt balance reduces, the interest rates and charges go down.
Over time your minimum payments could get smaller, so your monthly income will have more of an impact on your debt.
Here at Money Savings Advice, we have partnered with some of the UK’s debt release brokers. They have already helped thousands of people reduce and remove a high percentage of debt, and if you are struggling with debt, they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers, then click on the below and answer the very simple questions.
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