Where to Start When Dealing with Debt
We know that dealing with debt can be daunting, and with so many advertisements vying for attention it can seem impossible to know how to begin managing it. Knowing how to effectively manage your finances and organise your debts is essential, so we’ve put together this guide to help you understand exactly where to start.
In this guide:
First of all, it’s important to organise the debts that you have - some will need paying sooner and some will be clearly more significant.
Begin with a list of your creditors and the amount that you owe them and start to put them in order of importance. For example, if you have secured payments (such as rent, auto loans or a mortgage), prioritise paying those off before unsecured payments, (such as credit card payments or student loans).
Creditors generally can’t claim collateral like your house or car on unsecured payments, but it’s still fundamental that you know what you owe to avoid problems in the future.
Budgeting is extremely important as you need to know exactly how much you can spend on your debts. This will help you to set up a realistic and manageable payment plan with your creditors. It’s essential that you know your outgoings and incomings each month to understand exactly how much you can afford to pay back. Leading on from this, speak to your creditors to help them understand your situation. You may be able to renegotiate your plan to a point that you’re both happy with.
You can also receive free financial advice from services such as the Citizens Advice Bureau, and our website can help you compare deals on a variety of different financial matters like insurance and mortgages so you can get the most out of your outgoings.
There are many ways that you can begin to organise your debts, and as with most things, some will be better suited to you than others. The two most common options for dealing with debt are a Debt Management Plan, or an Individual Voluntary Agreement.
Debt Management Plans
A Debt Management Plan is a monthly payment plan, combining your current debts into a monthly payment that fits with your financial situation. This is useful because you don’t have to worry about juggling multiple debts, as they’re all consolidated into one single debt. However, it’s important to note that this option is only available for unsecured debts.
Debt Management Plans are generally opted for when you can only afford to pay back a small amount each month and/or you are having trouble with your debt (but will be able to begin repayments soon). A plan can be organised either between you and your creditors or, for a fee, it can be arranged through a licensed debt management company.
In the case of using a debt management company, you would give them the details of your financial situation and they will then get in touch with your creditors in order to agree to a plan and calculate your monthly payments. When finalised, you make your monthly payments to the debt management company, which they will then share between your creditors. The overall cost would generally consist of a set-up fee and some companies will also charge a handling fee for each payment made.
Sometimes your agreement won’t stop a creditor requesting you pay your loan back in full at a later date or attempting to recover debt even when you are making payments, so make sure you fully understand the agreement before signing.
Creditors can also freeze the interest and penalties on your debts so that reducing your monthly payment doesn't significantly affect the amount you need to repay, so you can take more control of your debt.
Individual Voluntary Arrangements (IVAs)
This option involves an agreement with your creditors to pay some, or all, of your debts through regular payments to an insolvency practitioner (often accountants or lawyers that are appointed to deal with situations where money can’t be paid back). The insolvency practitioner will then divide the money between those you owe money.
Your insolvency practitioner will work out how long this arrangement will last and how much you can afford to pay back at a time. As with a Debt Management Plan, you’ll have to disclose the details of your financial situation in order for them to do this.
For the IVA to be accepted, the creditors holding 75% of your debts have to agree to the arrangement. If they do agree, it will apply to all your other creditors (regardless of whether they agreed or not) and will stop creditors from taking action against you to reclaim money.
There is a handling fee and a set-up fee for IVAs, and the agreement can be cancelled by your insolvency practitioner if you stop payments, which can lead to bankruptcy. Your agreement will also be added to the Individual Insolvency Register for three months, so be sure to understand the costs and risks involved before agreeing.
You could also be refused credit if you have an Individual Voluntary Arrangement or a Debt Management Plan, but both are good options to consider when first struggling with debt.