What are my options for dealing with my debt?

More information can be found in our Options for dealing with debt (203 kb)   factsheet

Self-negotiation

If you feel confident dealing with your debts yourself, you could try and negotiate an affordable repayment plan with your creditors.

To begin, you would have to draw up a financial statement or budget sheet.

First you put down your income (i.e. wages, benefits, tax credits, child maintenance) then take away your essential outgoings (i.e. rent/mortgage, council tax, gas, electricity, TV licence, food, toiletries, travel costs, telephone, health care and medical costs).

Whatever is left over is your surplus. This is all you have left to pay your debts.

If you have fallen into arrears on any priority payments (e.g. rent/mortgage, council tax, fuel, TV Licence, hire purchase agreements) you need to come to an arrangement to pay these back first.

You could offer your normal monthly payment, plus a bit more to cover the arrears. You may want to seek help from a money adviser if you have any priority arrears.

Once you have come to an arrangement with any priority debts, you will then be able to see how much is left over for non-priorities. You can make each of these creditors an offer to pay them back each week or month at a rate you can afford.

The fairest way to split your surplus is on a pro-rata basis. This means the debt you owe the most money to would get the highest offer and the debt you owe the least to would get the smallest offer. A money adviser would be able to help you work this out.

If you have hardly got anything left at all once you’ve paid your essentials and any priorities, you could offer a very small amount or token payment. By this we mean £1 per month.

You would then write to your creditors to make your offer and ask that they freeze any interest and charges they may be adding to the debt. You should also send them a copy of your financial statement to show them you are offering them all you can afford.

The creditors don’t have to accept your offer. However if they say no at first, keep on paying them what you can afford and write back and ask them to reconsider.

Free Debt Management Plan (DMP)

A debt management plan is very similar to self-negotiation, however instead of writing to the creditors and sending payments to them yourself, another company does it for you.

They would just take one payment from you every month and then they would contact the creditors for you and distribute the money for you.

There are many companies who offer a debt management service however most of them will charge you.

This means it takes longer to clear your debts and sometimes creditors aren’t happy as the money you are paying to the company could go directly to the debt.

There are two organisations who offer debt management plans free of charge.

• PayPlan
• Consumer Credit Counselling Service (CCCS).

Administration Order (AO)

An administration order allows you to make one, affordable payment to the county court each month. They then distribute the money amongst the creditors for you.

Whilst you are making payments each month under the AO the creditors can’t take any action against you. Generally this means telephone calls and letters will stop.

Not everyone is eligible for an AO. You have to have at least two different debts, can’t have more than £5,000 worth of debt and you have to have at least one unsatisfied County Court Judgment (CCJ) (see How to deal with debt for more on CCJs) 

There are no up front fees to pay to apply for AO but the court does take 10p in every £1 you pay for administration costs.You have to fill in an application form called an N92. You can pick this form up from your local county court or download it from the following website: www.hmcourts-service.gov.uk .

The address for your local court should be in the telephone book.

If it looks as though it will take more than three years to clear the debts under the AO, the court can make a composition order. This would limit how long you have to pay the debts back for, usually to three years.

Debt Relief Order (DRO)

A Debt Relief Order is a new option for dealing with debts. It was introduced in April 2009.

If granted, a DRO would give you 12months where you don’t have to make any payments towards your debts.

You still have to pay your essentials such as rent, food, travel costs for example, every month.

During the 12months the creditors are prevented from taking any action against you to recover the money. At the end of the 12months, as long as you still meet the criteria, the debts are written off.

There are strict eligibility criteria you have to meet before you can apply for a Debt Relief Order. Your debts must be less than £15,000 in total.

You can’t have any assets worth more than £300 (or £1000 if it is a car).

When you complete your financial statement you can’t have more than £50 surplus each month.

If at the end of the 12months your circumstances have changed and, for example, you do have more than £50 per month surplus, the DRO would be revoked and you would have to start paying your creditors again.

The decision about whether to grant a Debt Relief Order is made by an Official Receiver working for the Insolvency Service. However the application has to be made via someone called an ‘Approved Intermediary’.

National Debt Line, Consumer Credit Counselling Service, PayPlan, Baines & Ernst, the Institue of Money Advisers and Citizens Advice Bureau all have Approved Intermediaries working for them.

There is a one off £90 fee to pay to apply for a Debt Relief Order. This can be paid in one go or in instalments.  If your application is not successful you do not get the £90 refunded.

Points to consider:

• A DRO would give you a 12month break from payments and your creditors, then the debts would be written off. This can alleviate a great deal of stress and worry about what your creditors might do.
• You can’t have debts of more than £15,000; have assets worth more than £300 or a surplus income of more than £50.
• You have to pay the £90 fee before the application can be made. You can however pay in instalments. 
• If you apply for a DRO and it is rejected because you don’t fulfil the criteria, you won’t get the £90 refunded. 
• A DRO will appear on your credit reference file for 6 years. This means getting credit will be harder in the future.

Individual Voluntary Arrangement (IVA)

This option is suitable if you owe more than £15,000 and have a high surplus income.

An Individual Voluntary Arrangement is a legally binding arrangement between you and your creditors to only pay back a proportion of your debt. Therefore some of it will be written off.

The people who set up IVAs are called insolvency practitioners. They all charge fees.

We would not recommend choosing an insolvency practitioner who asks you to pay fees up front, many will build their fees into the payment plan.

The insolvency practitioner puts together a proposal which they send out to all your creditors, asking if they are willing to only accept a proportion of your debt back.

The creditors then get to vote, 75% worth of the debt have to vote yes.

The plan involves paying a set amount of money to the insolvency practitioner each month. They will then take some for their own fees and spread the rest amongst your debts. Most IVAs last for 5 years.

If you own your own home and it has equity (which means that the house is worth more than the mortgage) you may be asked to release some money from your home in the 4th year of the plan. This is called an ‘equity release clause’.

Points to consider:

• You have to be confident that you can maintain payments to the IVA for the full 5 year term. If your income fluctuates this may not be an option for you as the IVA would fail if you can’t maintain the payments.
• You generally have to be able to pay quite a high amount each month. On average around £200 to £250. This will depend on how much you owe.
• An IVA is a form of insolvency. The IVA will be registered on your credit reference file for 6 years
• If an IVA is set up, because the creditors have accepted that you will pay them through the insolvency practitioner, contact from them will stop. This can relieve a lot of stress. 
• If you are a homeowner you could be asked to remortgage or try and get a secured loan in order to pay a lump sum into the IVA.
• There are fees of around £4,000 to pay, however you may be able to do this in monthly instalments.

Bankruptcy

Bankruptcy is a way of writing off all of your debts.

It could be suitable for you if you think you won’t be able to repay your debts in a reasonable period of time, or if dealing with your debts and your creditors is causing you a great deal of stress and worry.

There is an up front fee to pay of £525 and also a court fee of £175. Everyone has to pay the £525, however you may be exempt from the £175 court fee if you are claiming certain benefits or are on a low income.

There are forms to fill in and you have to attend a hearing at your local county court. You may want to get help from your local advice agency with filling in the forms.

Once you have been declared bankrupt you will be interviewed by someone called an Official Receiver (OR). It is their job to deal with the administration of your bankruptcy and to try and get as much money as possible for the debts.

If you own your home and there is equity in it then it is likely to be sold. The money raised from the sale will go towards the bankruptcy debts.

If you rent your home you may want to check your tenancy agreement to make sure going bankrupt won’t affect your home.

Any other assets you own (such as a car) could also be sold.

If you are working the Official Receiver will go through a financial statement with you. If he thinks you have a surplus, they will ask you to make a payment every month which will go towards the bankruptcy debts.

This is called an Income Payment Arrangement and can last up to three years. The Official Receiver is unlikely to make an Income Payment Arrangement if your income is solely made up of benefits.

You are generally bankrupt for 12months. At the end of the 12months your debts are written off and you have a fresh start.

It is still possible to have a bank account if you have been made bankrupt but it would be a basic account. This means you wouldn’t get a cheque book or overdraft.