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debt solutions

Choosing a debt solution is a big decision, and with so many options out there it can be difficult to know which one is the best fit for you.

That’s why we’ve put together this handy guide – so you can quickly compare solutions. Click on the name of a debt solution to find out more about it.

 

Informal Solutions

The first section of this guide is dedicated to informal solutions for unaffordable debt. These are solutions organised without legal intervention, and allow you to deal with your debts without having your details listed on an insolvency register. Using an informal solution also tends to have less of an impact on your credit score, and can even improve it in some cases. On the other hand, you are not afforded any legal protection from your creditors when you choose to pursue and informal solution, and they could still attempt to make you bankrupt or seize your assets.

Debt Management Plan

A Debt Management Plan (DMP) is a payment plan agreed upon between you and your creditors. It allows you to repay what you owe in smaller instalments, and over a longer period of time. Your creditors may agree to freeze interest, fees, and charges on your debts to make it easier for you to clear them, but this is up to individual creditors.

You can either negotiate a DMP with your creditors yourself, ask a debt charity to help you, or hire the services of a private debt management firm. There is no set length for a DMP, but they don’t usually last longer than ten years. If you expect that it would take longer to clear your debts, a formal plan which allows you to write some debt off could be a better option.

If you think you could manage to pay off all of your current debt given a longer time-frame and reduced monthly payments, a DMP could be the right solution for you.

Debt Consolidation Loan

A debt consolidation loan is a loan taken out in order to clear your current debts, leaving only one to pay back. Usually, the new loan will have a lower interest rate, or longer repayment term than your current debt, making it more affordable and straight-forward to repay.

The main benefit of using a debt consolidation loan is that it can have a positive impact on your credit score, assuming you keep up with your new payments. It also makes it easier to keep track of what you owe, since you end up paying only one lender every month rather than several. However, this option should be considered carefully, because it can be difficult to obtain further credit if you’ve struggled with debt in the past. Your loan is likely to be more expensive overall than your current debts, despite being more affordable on a month by month basis.

If your credit rating has not been too damaged, and you feel able to repay the current value of your debts plus interest if given enough time, this could be the right option for you.

Debt Settlement Offer

A debt settlement offer is a one-off lump sum payment offered to your creditors, in exchange for clearing your outstanding debts. This lump sum is usually a wind-fall, or provided by a third party.

If you have a lump sum available, and do not think your circumstances are likely to improve in the future, this could be the right solution for you. You will usually have to negotiate with your creditors yourself, so it is important to consider your offer carefully before opening discussions with them.

 

Formal Solutions

Formal debts solutions are legally binding – they can only be administered by someone who is appropriately qualified, and offer you legal protection from your creditors. They are bound to sick to the terms of whatever repayment agreement is reached. With a formal debt solution, you will not be expected to communicate directly with your creditors, which can significantly reduce stress. However, with these options, you are legally classed as insolvent, meaning your details will appear on a public insolvency register, and your credit rating will be negatively impacted. They can also incur administrative fees.

Trust Deed

A Trust Deed allows you to make a single contribution towards your debts each month, based entirely on what you can afford. The payments continue for a set length of time, usually five years, at the end of which any remaining debt is written off. As long as you keep up with your payments, your creditors will no longer be allowed to contact you or take any legal action against you.

A Trust Deed could be a good fit for you if you feel unable to clear all of your debts in a reasonable length of time, and cannot afford your current monthly payments.

Trust Deeds are only available to Scottish residents. For England, Wales, and Northern Ireland, Individual Voluntary Arrangements (IVAs) are roughly equivalent. For more information about IVAs, see below.

Individual Voluntary Arrangement

Individual Voluntary Arrangements (IVAs) allow you to reduce the amount you pay towards your debts each month, making them affordable. After making these payments for a set amount of time, usually six years, any remaining debt which you have is written off.

As long as you keep up with your Trust Deed payments, your creditors cannot contact you or take legal action against you. IVAs are also suitable for people who are self-employed, and allow for flexible monthly contributions to account for fluctuating income.

If you do not feel able to repay your current debts in their entirety, but could make a reduced monthly payment over a fairly long period of time, an IVA could be the right solution for you.

Debt Arrangement Scheme

The Debt Arrangement Scheme (DAS) is a solution designed by the Scottish government to help people struggling with problem debt. Under the scheme, you will establish a Debt Payment Plan (DPP) with your creditors. They will agree to freeze interest, fees, and charges on your debts, and allow you to make smaller monthly contributions for a longer period of time. There is no set length for the plan, but according to the Accountant in Bankruptcy (AiB), Scotland’s insolvency service, the average length of a DPP is six and a half years.

If you live in Scotland and think that you could pay off your debt in its entirety if interest and fees were frozen, the DAS could be the right debt solution for you.

Administration Order

If you have debts of less than £5,000, owed to at least two creditors, and a County Court Judgement has been taken out against you, you could be eligible for an Administration Order.

The Order is granted by the Court, and prevents your creditors from taking further legal action against you – this includes the protection of your assets. Under the Administration Order, you will be expected to make a monthly payment to the Court, who will then distribute it among your creditors. During this time, fees and interest on your debts are frozen, but you will be expected to pay back what you currently owe in full. Administration orders can vary in length depending on your income and level of debt, but usually last around three years.

If a County Court Judgement has already been taken out against you, and you have a relatively low level of debt, applying for an Administration Order could halt further legal action, and allow you to repay your debt in an affordable way.

Debt Relief Order

A Debt Relief Order (DRO) is basically a low-cost alternative to bankruptcy. It is only available to people living in England and Wales, but is similar to the Scottish Minimum Assets Process.

If you are granted a DRO, you will be relieved from all of your debt obligations for one year. After this time has passed, your debts will be written off entirely if your financial circumstances have not improved.

You are likely to be granted a DRO if your surplus income does not exceed £50, the value of your assets does not exceed £1,000 (excluding a vehicle), and you have debts of less than £20,000.

Bankruptcy

Bankruptcy is a process which clears unaffordable debts in a relatively short space of time, but is usually considered a last resort.

During the bankruptcy process, you will transfer control of your assets to an Official Receiver, who decides which items should be sold, and how the profits should best be distributed among creditors. Only non-essential items will be sold, however.

The Official Receiver may also decide that you could afford to make a monthly contribution to your creditors, if your disposable income is sufficient. Bankruptcy usually lasts for a year, after which your debts are cleared.

Bankruptcy does prevent you from holding certain positions, and can make it very difficult to access credit in the future, but it could be the best option if you cannot afford monthly debt repayments and have high levels of debt. Applying for bankruptcy costs £680.

Sequestration

Sequestration is essentially the Scottish equivalent to bankruptcy. During a sequestration, control of your assets is transferred to your appointed Insolvency Practitioner (IP), who decides which assets to sell, (like bankruptcy, you will be able to keep essential possessions) and how the profits should be distributed among your creditors. If your disposable income is sufficient, you may also be asked to make monthly contributions towards your debts.

Like bankruptcy, sequestration usually lasts for a year, after which your debts are written off. It costs £200 to apply for sequestration, but is this is not affordable, and you have few assets, you could be eligible for the Minimal Assets Process, which costs only £90 to apply for.

Sequestration should only be considered if you do not think you could manage monthly payments towards your debts of any value.

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