The common debt solutions
The picture at the top of this page is a good at-a-glance guide – go round the roundabout and turn off at the first road that will work for you! If you want to do this a more scientific way, then work through Debt Camel’s “Take a financial selfie” – that will give you a Financial Summary and the flowcharts will indicate which debt options are most likely to be of use to you.
The next thing to do is to look at the details of the most likely choice(s) for you. Debt Camel has a “Guide” for each of them which explains how it works, the pros and cons, and how to set it up. The five main debt options are:
- Snowball your debts! This is almost always the best solution if you can make at least the minimum payments on your debts each month. It has the major advantage that as you snowball, your credit rating will get better and better, unlike all the other debt solutions that will damage your credit rating.
- Debt Management Plan (DMP) where you pay less than the normal payments each month and ask your creditors to freeze interest. It can just be a temporary measure if needed eg until you find another job.
- Debt Relief Order (DRO) if you owe less than £20,000, have little or no spare income and don’t own a house.
- Individual Voluntary Arrangement (IVA) can work well if you have a reliable income and assets to protect such as a house with equity.
- Bankruptcy which sounds scary but for many people it is the fastest and simplest way to be able to start again. Find out the facts rather than dismissing this because of myths and rumours that may not be correct for you.
The last three – DROs, IVAs and bankruptcy – are all types of insolvency. They are formal legal arrangements that aim to resolve a debt problem completely and are not suitable as a temporary measure. Most types of debt are included, but check this page for details.
There are three less common debt solutions:
- Full & Final Settlements These can be very useful if you have been on a DMP or haven’t been able to make any payments at all for a while and you may be able to get a lump sum.
- Write-off Debts, Creditors won’t usually consider these unless there are unusual circumstances, and
- Administration Order These are now very rare. In September 2016, there were only 16 made in England and Wales.
Other ways to improve your situation
It is also useful to look into other ways to improve your finances , such as selling assets, paying less interest, reducing your expenses and increasing your income. If you can make a big enough change to your situation, then you may be able to snowball and not need a DMP or insolvency at all!
Debt consolidation may be possible if you are going to be Snowballing your debts. It can sound appealing but may be difficult in practice to be offered a large enough loan at a good rate of interest.
If you don’t have enough money for your expenses if you pay nothing to your debts, then this needs to be tackled before trying to resolve your debts, even if your debts feel urgent. There are some ideas here: Emergency – not enough to live on.
Making the right choice
Choosing the best debt solution is vital. If you have read through how some of your possible options work, you will hopefully have ruled some of them out, but many people will feel unsure which of two options to choose.
Have a look at Debt Camel‘s Hard Choices page, which provides a direct comparison of many of the options, such as “IVA or bankruptcy”, and also looks at difficult decisions such as “How far should I cut back my expenditure?”
Good, reliable and free debt help and advice is available. Make sure you talk to one of the good guys though, a national charity such as National Debtline or your local Citizens Advice Bureau.
The adverts you see offering “free advice” usually turn out to be anything but free… and never trust anyone that cold-calls you offering debt advice.
It’s important to take your time and research your options. Don’t let worries about defaults or bailiffs panic you into making a fast decision that you will later regret. Good debt advisors want you to be comfortable with the route you choose and will be happy to answer questions about all the alternatives and how they work.