Money Means guides are brought to you by FSCS, the people who protect your money from £1 up to £85,000 in UK banks, building societies and credit unions. Find out more.
An important milestone was reached in September 2017 – it was 10-year anniversary of the global financial crisis.
High street bank Northern Rock sought emergency funding from the Bank of England on September 13, 2007, prompting the first run on a bank for more than a century. The stream of events that followed flung Britain into financial turmoil.
While economists and politicians are still thrashing out how to best mend the British economy, many individuals are suffering their own financial crisis.
Consumer credit - which includes credit card debt and unsecured loans – has climbed above £200 billion since December 2008.
The average household in the UK now owes a record amount of £12,887, even before mortgages are taken into account, according to the TUC. However, many people’s debts run much, much higher.
These increases in household debt are a warning that families are struggling to get by on their pay alone. As a result more are relying on borrowing to make ends meet and getting into debt.
So, what can you do?
The most important thing to remember is to admit to the problem, and tackle it head on. Burying your head in the sand will make things much worse – and all the while, debts will keep increasing as interest charges build up.
If you’re at the point where you’re missing repayments, borrowing even more to manage existing debts or if you have debt collectors chasing you, it’s time to seek the help of a professional.
Debt advice is best sought from a debt charity which will advise you, and act on your behalf, free of charge. Steer clear of debt help or loan consolidation companies that often advertise their services in the press. They will charge for advice and these fees will only serve to add to your existing debts.
The benefits of getting help – especially free help - can kick in straight away. As long as you can prove and have sought debt help or can show you are trying to repay your debts using a self-help tool, debt collectors won't contact you for at least 30 days thanks to an agreement between the Government and the Credit Services Association, the body that represents debt collecting agents.
A debt counselling service will inform all of your creditors, which will then give you a month's breathing space to work out the best route to get yourself out of debt.
When your debts have gone beyond you being able to repay them, there are several solutions that may be recommended to you. Here are some of the most common ones to consider:
Debt Management plan
This is an agreement between you and your creditors (the people to whom you owe money) to pay all of your debts.
Debt management plans are usually used when you can only afford to pay creditors a small amount each month. An adviser will work with you to establish what money you need to live on. Any money left over will be consolidated into one monthly payment to your debts.
Your plan can be cancelled if you don’t keep up your repayments so you need to make sure you can afford the agreement or you will be back to square one. Since you’re making reduced credit repayments, your credit rating will be affected.
Debt Relief Order (DRO)
If you owe less than £20,000, don’t have much spare income and don’t own your home then a debt relief order might be the answer. The benefits of a DRO are that it prevents your creditors from taking you to court for a period of 12 months, and at the end of this period your debts will be wiped.
But to be eligible there are strict criteria. As well as your debts not exceeding £20,000, you must have less than £50 a month spare income and own less than £1,000 worth of assets, which includes any car you may own. You also need to have lived or worked in England and Wales within the last three years and you must not have applied for a DRO within the last six years.
You can’t apply for the order yourself – you must apply through an authorised debt adviser. There’s an administrative fee of £90 to apply, but in some cases a charity may be able to help you with the cost.
The DRO will appear on the Insolvency Register and be cleared three months after the order expires. The register allows members of the public to search for people who are insolvent and have undergone bankruptcy proceedings or other debt agreements – such as a DRO. The DRO will stay on your credit record for six years.
Individual Voluntary Agreement (IVA)
An IVA allows you to make reduced debt repayments over a specific period and prevents your creditors from taking you to court. You need an insolvency practitioner to help set up an IVA. They will calculate what you can afford to repay and how long the IVA should last. You’ll have to give details about assets, debts, income and creditors.
For the IVA to go ahead, creditors holding 75% of your debts must agree to it. If it goes ahead, it will apply to all your creditors, including any who disagreed.
There are usually two fees for an IVA – one is a set up fee and the other is a handling fee which will be applied each time you make a payment. According to Citizens Advice, fees are in the region of £5,000 on average.
Your IVA will be added to the Individual Insolvency Register and is removed three months after the IVA ends. However, it will stay on your credit record for six years.
Bankruptcy is a legal procedure for people unable to pay their debts, that involves sending an application to the Insolvency Service with details of what you owe and your income. If the application is successful, all unsecured debts will be written off and your creditors will no longer be allowed to pursue payment. Any assets you have would be sold off and there are quite severe financial restrictions during the bankruptcy period. There are fees of £680 to become bankrupt. You’ll pay an adjudicator fee of £130 and a deposit of £550. You will be added to the Individual Insolvency Register and details of your bankruptcy will stay on your credit record for six years.
*The views expressed in Money Means are of the writers and not the FSCS and should not be regarded as advice.