The vast majority of people in the UK have financial debt, be it for a home or a car.  For your debt you need to answer two questions:

1. Is your debt increasing?
2. Can you afford your present level of debt?

If the answer to either of these questions is yes, you may need to manage your debt in a different way.

Where to start

Go through the “managing your Money process” if you haven’t already done that.  This will establish if your debt is increasing because you can’t meet the costs of your everyday needs, or because of big-ticket items, such as holidays, cars and gadgets.

Reducing your repayments

To reduce your monthly debt repayments consider the two steps below:

1.  For mortgage debt

Check if you can reduce your monthly outgoings by refinancing your mortgage to achieve a lower interest rate and/or a longer term.  But … beware that early release penalties and arrangement fees may actually increase your costs in the first year.

2. Debt consolidation

Itemise all of your debts and the repayments.  You can use our simple spreadsheet to help you.

If you have two or more substantial debts, you might benefit from consolidating all of these into a single debt.  For example, consolidating all of your credit card debt with a Churches Mutual consolidation loan could half your repayments … and sometimes it can be even better than that!  Use our loan calculator to see how your repayments could reduce.

Other avenues

If you need more serious interventions there are a number of options.  A brief summary is given below.  Some of these approaches may have a significant negative impact on other parts of your life.  It is vital that you take independent advice before taking any action.  The first step could be to talk to Churches Mutual who can explain some of your options, and the impact they might have.  Alternatively, you might talk to each lender and explain your situation.  Some lenders can provide help, such as payment holidays, which could avoid the need for more drastic action.

The three main options are:

• Entering a Debt Management Plan (DMP)
• Entering an Individual Voluntary Agreement (IVA)
• Declaring bankruptcy

What is a Debt Management Plan (DMP)?

The least formal debt plan, it’s an agreement between a debtor and creditor when usual contractual payments cannot be made due to financial difficulties. It is not legally binding so there is no obligation for the creditor to agree to freeze interest rates or change and stop default action if your loan is in this position. Although they don’t have to agree to the plan, creditors often agree to reduce or stop the interest rate and any charges that your loan may incur.

Although some creditors may freeze or reduce interest rates, the DMP will continue until the debt is paid back in full, including any repayments of interest and charges that applied to the loan. If you choose this option, you will contact a DMP provider who helps you work out an affordable monthly repayment and contacts the creditor on your behalf. Alternatively, you can arrange this yourself or contact Citizens Advice (CA) – by doing this yourself you could save yourself money as most DMP providers charge for their service. Therefore, we advise contacting your creditors yourself. If it is agreed, you will then make one monthly repayment to your DMP provider, who then pays your creditors on your behalf.

What is an Individual Voluntary Arrangement (IVA)?

If a DMP isn’t working out for you, or if it’s not feasible, it may be suggested that you get an Individual Voluntary Arrangement (IVA). This is a legally binding agreement between you and your creditors. Once you begin to set up an IVA, an Insolvency Practitioner will work with you to put together a proposal to take to your creditors for approval. This is not usually a free service.  Within an IVA there is a voluntary code of practice called the IVA Protocol. All insolvency practitioners and most creditors have signed up to this protocol, as its aim is to make sure all IVAs are clear and fair. Please be aware that your creditors can challenge an IVA proposal, as they are not forced to approve it. Once this agreement has been signed, neither you nor your creditors can change your mind. It’s important to make sure it’s the right decision for you. 

An IVA freezes your debts and allows you to pay them back over a set period. Choosing an IVA can mean that up to 80% of your debt is written off and you pay the rest back in affordable monthly repayments, with no added interest and no further legal action from your creditors. To be considered for an IVA you will need to prove you have a long-term income, as the repayments for an IVA usually span over a five-or-six-year period. After this period your debts would be discharged.  This plan will be listed on the Public Insolvency Register and recorded on your credit file, meaning your credit rating will be affected. The IVA will be erased from your credit file six years after the IVA has ended, which could be 12 years after it started. The decision to enter an IVA should not be taken lightly and requires your full co-operation with your IVA Supervisor. You will not be able to take out any new lending above £500 during the IVA without the consent of the IVA practitioner.

What does bankruptcy mean?

Applying for bankruptcy should be a last resort as it can have a lot of implications on your financial health. Make sure you talk to a debt advisor before you make this decision, as there might be other options for you before resorting to bankruptcy. If you find yourself in this position, bankruptcy can help you write off all the debts you can prove you owe. This would then allow you to make a fresh start and can help reduce pressure as you won’t have to deal with your creditors. In most cases of bankruptcy, you can make a fresh start after a year. However, if you have any assets they will be taken into consideration when going bankrupt and could be used to pay off your debts. Once you are bankrupt you won’t be able to apply for credit of over £500 without telling the lender about your bankruptcy and any credit you will receive in the future is likely to be expensive. Bankruptcy affects your credit rating and credit reference agencies will keep the details of your bankruptcy on file for a minimum of 6 years.  It can also make it more difficult getting a mortgage or entering a tenancy.