Debt can quickly become overwhelming. What may have started as a single personal loan a few months ago, can quickly turn into multiple loans, credit card bills and rent/bills arrears. Eventually, you may reach a point when you’ve exhausted all borrowing options. At this point, it may seem like there’s no escape, however there is always a way out of debt – it may just be a case of seeking out professional debt help.
Additionally this can take a toll on your mental health- stress due to debt can cause insomnia, anxiety, depression and a host of ailments too. You may despair or wake up scared to carry on. You may fear the debt letters or emails and phone calls. The uncertainty is difficult for anyone.
There are four common ways to get out of heavy debt. You can learn more about these below.
A DMP (debt management plan) is an agreement to continue paying off your debts, but at a reduced rate. If you cannot keep up with the current monthly debt repayments, a DMP could help lower these to make them more affordable. While you can negotiate debt payments with creditors yourself, choosing a DMP allows professionals to do the negotiating for you.
DMPs do not cover priority debts (e.g. mortgage, council tax debt etc.) and are informal agreements that lenders can go back on at any time. They can also have a serious negative impact on your credit score. The benefit of these forms of debt relief is that almost anyone who is struggling with debt can apply for them and you will not be added to an insolvency register.
DRO stands for debt relief order. This is a legally binding order in which all of your debts are temporarily halted for a length of time (usually about a year). This period of time is known as a ‘moratorium period’ and is a chance to improve your financial circumstances. If after the moratorium period, you have tried to improve financial circumstances but not been successful, your debts will be written off.
To apply for a DRO you must have debts no more than £30,000 and a disposable income of less than £75 per month. It is recommended for those that have assets less than £2000. Lenders must abide by a DRO, unlike a DMP. A DRO also applies to priority debts. Just be wary that you will be added to an insolvency register.
An individual voluntary agreement (IVA) is another option. It is similar to a DMP in that you continue to pay back your debts but at a reduced rate. Unlike a DMP, it is legally binding. IVAs typically last 5 to 6 years, after which any outstanding debt may be wiped.
IVAs are available to anyone with unsecured debts over £7000. Unlike a DRO, they are recommended for those with assets over £2000. Like a DRO, you will be added to an insolvency register. You can check out this site for more IVA advice.
Bankruptcy is sometimes seen as the most extreme option and has a certain stigma around it, but there are times when it can be the best option. The bankruptcy period lasts 12 months – during this period, any non-essential assets you own and excess income you earn are used to pay off your debts. At the end of this period, you are discharged and any remaining debts are written off.
Bankruptcy is only an option for those with debts over £5000. You will be added to an insolvency register and you may find that you are not able to borrow any money for a certain period after. The advantage of bankruptcy is that all your debts are wiped after a year, making it quicker than IVA.
Whichever option you choose make sure you look after your mental health and wellbeing and get support from loved ones and those around you. This may include visiting your GP if you need too.
This article was written by a freelance writer and edited by Eleanor Segall.