Getting help with problem debts

Thursday, 11 February 2016

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Independent financial and debt advice, Edinburgh, Fife & UK

If you are having problems making the monthly payments on your cards, mortgage, loans or utility bills then the worst thing you can do is to ignore the problem and hope it goes away. It won’t – it will only get worse.

There are several solutions. The first step is always to talk to your lender and tell them that you are having difficulties. They may be willing to stop adding interest to your debt, and increase the term of your loan, reducing the monthly payments.

If this does not resolve the situation there are several measures to consider, in ascending order of seriousness:

1) Debt Management Plan (DMP)

A debt management plan (DMP) helps you to manage your debts and pay them off at a more affordable rate by making reduced monthly payments.

DMPs are relatively informal agreements between you and your lenders. You start by agreeing a monthly household budget. That way, only money you can afford goes to your creditors.

Some of your creditors may still contact you, but you can get advice from charities on how to deal with this. Most creditors will see that you’re repaying and agree to stop interest and charges as a gesture of goodwill, but some may not.

As you’re making reduced payments your credit rating will be affected.

2) Debt Arrangement Scheme (DAS)

These are run by the Scottish Government and, with the help of an approved money advisor, allow you to repay your debts through a debt payment programme (DPP). You make one monthly or weekly payment to your creditors. While the DPP is in place your creditors can’t take any further action against you (unlike with a DMP).

Any interest or charges that are being applied to your debts will normally be frozen. If your situation changes you can apply to vary your payment or apply for a six month payment break. A DPP will appear on your credit file for six years and is only available if you live in Scotland.

3) Trust Deed (known as IVAs in England, Wales and NI)

Trust deeds are a legally binding arrangement between you and your creditors, where you repay your debts over a 4 year period. During this time you make one monthly payment and at the end of the 4 years any remaining debt is written off.

A trust deed is a form of insolvency, so your unsecured debts need to outweigh the value of your assets, such as a house or vehicles. Unsecured debts include things like credit card debt, personal loans and store cards.

You need an Insolvency Practitioner (IP) to set up a trust deed. An IP normally takes a charge for their service out of your monthly repayment, so it’s important to shop around and find the best one for you.

Once your trust deed is approved, your creditors won’t chase you for payment or add more interest and charges to your debts, and they can’t take any court action. While you may have to sell some assets, you’re usually able to keep one vehicle as long as it’s worth less than £3,000 and is essential.

A trust deed may affect the terms of your employment; you should check your contract or speak to your HR department. There’s the risk of bankruptcy by sequestration if the trust deed fails. Your credit rating will be affected for six years, starting from the date the arrangement is agreed.

4) Bankruptcy

Bankruptcy is a form of insolvency and is normally only suitable if you can’t pay back your debts in a reasonable time. Assets you own, such as your house or car, will usually be sold to pay off your debts. This means if your assets are worth more than your debts, or if all of your regular payments are up to date and you can afford to keep paying them, bankruptcy is unlikely to be the best option for you.

You can be debt free in a short amount of time. All your unsecured debts are usually written off, though you may be required to make a contribution. You’ll receive no further contact from your creditors.

However, if you have any assets, like a house or car, these may be sold to release funds for your sequestration. It may have implications for your job – for instance you will not be able to act as a company director. You may find it difficult to take out credit, as sequestration will remain on your credit file for six years.

There are many companies out there that will offer to help, but we always recommend that you use a charity, as you will avoid paying fees and your debt will therefore reduce faster. We are not linked with any particular charity, but have heard really good things about StepChange:

so would advise getting in touch with them first, and trying their Debt Remedy tool:

Independent financial advice. Regulated by the Financial Conduct Authority (FCA no. 603653). Company no. SC450460