Advice on debt in the UK

The hardest bit about having a debt problem is admitting to it in the first place.  The most important bit is knowing what to do about it.

With so many IVA, debt management and debt consolidation companies advertising on daytime TV, in the back of newspapers and online, it's difficult to know which solution is the right one for you.

The truth is that it depends on a number of factors, including how much you owe, how much you have available each month to offer to your creditors, whether you have any assets to protect and what you do for a living.

The first thing you need to do is decide whether you have a money management problem (this is where you do have sufficient income to meet your credit commitments but you spend too much on non-essential items) or a debt problem (this is where you do not have sufficient income to cover both your essential expenditure, things like food, utilities, rent and travel, and your credit commitments), as tackling each require a fundamentally different approach.

Money management requires advice on how to budget and control your spending more effectively, whilst a debt problem requires a intervention of a trained debt advisor.

If you do have a debt problem, the best thing you can do is go and seek the advice on debt from a specialist charity advisor (whilst not all commercial advisors are disreputable, the chances of you contacting an ethical charitable advisor is much higher).  They will be able to look at your financial and professional circumstances and determine the most appropriate (least drastic) solution for your situation whilst making sure you have enough to cover essential expenditure and priority debt arrears (such as Council Tax and court fines).  This could be any one of the following:

• Remortgage (if you have sufficient equity in your property and you can afford the repayments, although this option is becoming much scarcer in that last 2 years as banks have tightened their lending criteria and house values have dropped).

• Unsecured debt consolidation – much like a remortgage in that it allows you to pay off your existing debts with a larger loan.  Only beneficial if your new monthly repayments are brought down to a manageable level and you are comfortable with the repayment term of the loan (which is likely to be much longer than previous credit commitments where scheduled to run for).  I'd steer well clear of this unless you have an exceptionally high proportion of high interest credit, a relatively small amount of unsecured debt (less than £5k) and a clean credit history.

• Administration Order – if you have less than £5,000 unsecured debt and a CCJ issued against you then this is an option.  A court basically distributes reduced creditor payments on your behalf and legally protects you from creditor enforcement action.  It will cost you 10% of your monthly payments however.

• Debt Relief Order – if you have less than £15k of unsecured debt, less than £50 available each month (after all of your essential expenditure and priority payments have been taken into account) and less than £300 in non-vehicle assets then this is an option.  It legally protects you from your creditors and discharges you from your liabilities after 12 months, although it does cost £90 to set up.

• Individual Voluntary Arrangement – need to owe more than £15k typically.  You payback what you can afford each month and you will be discharged from your liabilities after 5 years (you may also be required to pledge equity from your home if you have any).  You'll also be legally protected from your creditors taking enforcement action against you and importantly, your home will be protected.

• Debt management – doesn't have the same legal protection as an IVA but the free debt management plans (provided by CCCS and Payplan) are a good option for anyone that isn't eligible for an IVA and wants to avoid Bankruptcy.

• Bankruptcy – typically discharges you from your liabilities after 12 months, although that can be extended by two years in an Income Payments Agreement/Order if the Official Receiver (the person administering your Bankruptcy), feels you have money left over each month that should go to your creditors.  It costs up to £612 to petition for you own Bankruptcy although you may get help with the £150 court fee if you're on income support.  Some professional bodies (those that deal with money such as accountants and solicitors) don't allow undischarged bankrupts to be members.

If you are resident in Scotland, the legislation governing insolvency is slightly different and you'll need to look at:

• Trust Deed – work in a similar way to IVAs in England and Wales except they typically last for 3 years, after which time, the balance of the unpaid debt will be written off.  You won't be protected from your creditors until your Trust Deed has been granted protected status.

• Low Income Low Assets (LILA) – must not be earn more than the equivalent of the standard national minimum wage (if you're on income support you will qualify), have more than £1,500 in unsecured debt and your assets must not exceed £10k.  You will normally be discharged and can start afresh after 12 months.  There is a £100 fee to pay.

• Debt Arrangement Scheme – works like debt management in that you must pay back your debt in full but unlike debt management, you are afforded legal protection for the length of the program.  There are advisors that will not charge for the service.

• Sequestration – Scottish equivalent of Bankruptcy.  Must owe at least £1500 in unsecured debt and it will cost you £100 to petition.

As you can see, with so many options to choose from, it's difficult to know which is right for you.  I suggest you do some research to make sure you understand what each entails and then call one of the debt charities listed below for debt advice:

www.nationaldebtline.co.uk

www.debtadvicefoundation.org

www.cccs.co.uk