Drastic action may be necessary if all of your efforts to enjoy freedom from debt are not successful.
Statistics show that on average 1,000 people a day are seeking some form of formal debt rescheduling.
According to creditaction.org.uk the average household debt in the UK is £7,982 (excluding mortgages). This figure increases to £15,353 if the average is based on the number of households who actually have some form of unsecured loan.
Average household debt in the UK is £55,816 (including mortgages).
Much of that debt is manageable of course, but those figures will include debt that isn’t being repaid when it should.
No Best Way to Clear Credit Card Debt
For some people, the amount of debt they are in means that they cannot realistically keep up with their repayments on loans, credit cards and so on. If you are being chased because your accounts are in arrears, with little or no chance of clearing them, then you might have to consider some drastic action to achieve freedom from debt. There are several ways to clear credit card debt for instance, but not all methods are right for every person.
One thing you must do, however, is keep up certain payments which are usually classed as “priority debts.” This is because you need somewhere to live, and you need fuel for light, heat and cooking. So, whatever happens keep your mortgage payments, rent, council tax, essential services like gas, electricity, and water rates up to date. In addition, secured loans against your property, taxes and fines must also be paid on time. Taking drastic action doesn’t mean you stop paying all your bills.
On the other hand, the consequences are usually less serious if you fail to keep up with “non-priority debts” which includes such things as credit card payments, store card payments, unsecured bank loans and overdrafts.
I’m not here suggesting you do nothing about your non-priority debts, they can’t be ignored, but if you only have a certain amount of disposable income available take care of your priority debts first and consider ways to become debt free.
Debt Consolidation Loan
You might consider taking out a debt consolidation loan. This involves consolidating all of your other loans into one big one. You add up what you owe on other loans, credit cards etc then take out one loan to repay these others. The advantages to taking out a debt consolidation loan is that the interest rate is usually lower than what is being applied to your other loans (especially on your credit cards), and you are just paying one single payment each month.
But, you should think very carefully before going in for a debt consolidation loan. Although the interest rate may be lower, you might need to pay the loan off over a much longer period, say 10 years or more, so you actually end up paying more out in the long run. Also, to obtain lower rates a debt consolidation loan might be offered to you on the basis it is secured against your home, like a mortgage. Are you comfortable knowing that if you don’t repay your loan you could lose your home? A debt consolidation loan might seem the logical solution to your debt problems but they should be viewed by you as taking drastic action, and professional – and ideally impartial – advice taken before going ahead with it.
Individual Arrangements With Creditors
Some lenders are willing to allow you to reduce your payments for a period of time. This could be enough to get you through the worst of it, until your finances were such that you could go back to your old level of payments. You might be on reduced hours at work and so are earning less than usual. It could be you are off work on long term sickness, or, in-between jobs. In these kind of situations a break from your usual payments could be a workable solution.
Debt Management Plans
On the other hand, sometimes it is best to get some professional, if charitable, help in dealing with creditors. Debt Management Plans can be set up so that you come to an agreement with those to whom you owe money, and your payments are fixed at a realistic level, sometimes with interest stopped. Often it is the interest that can be the crippling part of loans and credit cards, so stopping it being added can be very useful.
IVAs
There are occasions, however, when the debts have got so bad that even at a reduced payment rate you just can’t carry on. This is where even more drastic action may need to be taken. If your debts are over a certain amount, currently £15,000, and you have sufficient income coming in, you may be able to apply for an Individual Voluntary Arrangement. There are a number of rules which apply to IVAs, so proper debt counselling is a must to get the best advice for your circumstances. An IVA could wipe out up to 70% of your debts by value. Once agreed an IVA is legally binding upon your creditors, interest stops, and they can not pursue you for your debts (unless you default on your agreed payments). An IVA last for 5 years normally, so it is no quick fix, but at least you have the knowledge you have done your best to repay at least some of your debts.
Administration Order
An Administration Order is another option to help get freedom from debt. To qualify for an Administration Order you must have at least one county court judgement issued against you. You must owe monies to at least two creditors. Also, you can’t owe more than £5,000.
With an Administration Order you make all payments in to the court, and they will pay your creditors after deducting 10% of the monthly payment. One of the good things about an Administration Order is that you don’t have to find an upfront fee to apply to the court.
You can download a form to complete – the N92 – to apply for an Administration Order.
Any interest and other charges on your debts are stopped once the Administration Order is granted, and you can no longer be chased by any of your creditors who are included in the arrangement.
When the debts are all cleared you then pay £10 and are given a “Certificate of Satisfaction” from the court.
Bankruptcy
The most drastic action one can take to experience freedom from debt is widely acknowledged to be bankruptcy. This is when your insolvency problems have got too bad. But, for some, it may be the only, and the best, solution. For many people bankruptcy can be a humiliating experience. Your relatives, friends and neighbours might get to know about it, and to some there is some stigma attached. You could lose your job if you become a bankrupt. Holding a bank account can be difficult, if not next to impossible, as most banks won’t allow bankrupts to have accounts. This is a pathetic situation, as there is nothing in law to prevent someone who has been bankrupted from holding a bank account. Fortunately there are a couple of enlightened banks – the Co-operative Bank and Barclays – which both offer basic bank accounts (without overdraft facilities) to bankrupts.
On the upside, the bankruptcy will normally last for just 12 months, your debts are wiped clean, and you get off to a fresh start. Starting off again can be tough, as you need to repair your credit standing, and that can only come with time. For some, bankruptcy brings welcome relief from being chased by creditors, not knowing where the next repayment will come from etc. Usually, creditors are reluctant to make debtors bankrupt, as they know they are likely to get less money back than they would by going the IVA route. If creditors want to make you bankrupt they are then going for very drastic action.
Remember, what you consider drastic action to resolve debt issues is relative to your circumstances. What is right for one person isn’t necessarily right for another, so carefully consider all your options before doing anything.
