In part 1 of our article we discussed how to address tackling debt concerns head on. Now that you have assessed your financial needs, created a budget sheet, and perhaps applied for some formal breathing space to help you do all that, you are ready to negotiate with your creditors.
Before you do this, think about what it is you hope to achieve, what remedy you want, and have your points clearly prepared. There are many potential remedies, all dependant on personal circumstances. We explore some of those below:
Out of time?
Under the Limitation Act 1980, creditors of unsecured debts – such as store cards, catalogue debt, personal loans or, in some cases, credit cards (check the terms carefully!) – have 6 years to enforce a breach of contract. This means they must take steps to recover the debt, usually by issuing court proceedings after sending out a default notice.
If you have not paid for 6 years after a default occurred, or if you have not admitted to owing the debt within 6 years of your last payment (known in legal terms as affirming), then the creditor is out of time to recover it – in other words, they are statute barred.
Creditors of unsecured debts such as mortgages have 12 years before being statute barred.
There are free template letters available from the major debt charities to help you assert this.
Request a write off
You may be able to persuade your creditors to accept a lump sum payment to write off the whole debt. You may have to offer to pay a significant portion of the debt for them to agree. Occasionally though, it’s possible to persuade creditors to write off the whole debt without a payment. This is usually where creditors are satisfied that they’re unlikely to ever receive any payments – perhaps because the person cannot work again, or has been diagnosed with a terminal illness, or has no assets.
If a write off is negotiated, you must ensure that the creditors agree that it is a full and final settlement of the whole debt.
This involves combining your debts into one single debt. Putting your eggs in one basket is not for everyone. You will be taking out credit to pay off credit. This means that you will be making a larger regular payment, with potentially increased interest rates over a longer period.
Take specialist advice before giving this serious consideration, particularly if you can’t promise yourself that you won’t take out credit again until this debt is paid.
Re-mortgage your home
This is very similar to debt consolidation, but this time the debt is secured against your home. This means your home will be at risk if you cannot meet the new payments. It may be suitable for you if you can find the right mortgage product and take specialist advice.
Debt management plan (DMP)
You can either negotiate this personally or use an agency. Agencies will charge a fee, but there are charities who will do the same job and won’t charge you.
The agency/charity will negotiate with your creditors on your behalf for a longer repayment period, lowering your regular repayments. You then make the regular payments to the agency/charity, who then transfer the relevant amounts to your respective creditors.
DMPs are suitable for people who can make a regular repayment due to applying a budget. The creditors can still contact you as part of their debt recovery protocols.
This is a court application to request that the court manages the re-payment of your debt. You must owe less than £5,000, have at least 2 creditors and have one court judgement against you. There is no court fee for applying, but the court takes 10% of the amount that you pay to them to cover the cost of administration. Contact from creditors, such as debt collection and letters, should cease, and fees and interest on the debt are frozen.
The repayment arrangements will continue until all debts are paid off or unless you apply for a Composition order at the same time. If the judge agrees to that, the debts are usually written off after 3 years. This results in a county court judgement against you.
Individual voluntary arrangement (IVA)
This is a form of insolvency, meaning you’ll need an insolvency practitioner (IP). As the fees can be quite expensive, it is important to take specialist advice first.
An IVA is an agreement to pay off your creditors in regular payments over a set period. It’s a legally binding arrangement and, if a combination of your creditors who together hold 75% of your debt agree to your proposal, their decision will bind any other creditors listed in the application regardless of whether or not they agree.
You must make regular payments to your IP, who then distributes that money among the creditors. Your creditors might specify conditions, such as requiring you to re-mortgage your home to release equity.
You can’t apply for more than £500 in credit without the permission of your IP, and your job may be affected if you need a particular license, e.g. lawyers, accountants, conveyancers or publicans.
You must meet the agreed repayments, because unless your creditors agree to a further extension, they may require your IP to make you bankrupt.
This is the most widely known form of insolvency and you can now make the application online. You’ll need to pay a large application fee.
Once you submit the application, an official receiver (OR) is appointed by the Insolvency Service. You must co-operate fully with them. They have the power to sell your assets to pay off your debts, but household items and any items that you need for work will be exempt.
If the OR assesses that you have enough surplus income after paying your essential bills, they may also require you to make regular payments into the bankruptcy to go towards paying off your creditors.
Whilst most bankruptcies last a year, sometimes they can last longer. If the OR assesses your surplus income to be high enough, they may require you to sign an Income Payments Agreement that lasts for 3 years.
Bankruptcy does not wipe out all debt and certain debts cannot be included in the application.
Debt Relief Order
If you don’t own your own home, owe less than £30,000 in debt, and have less than £75 left over each month after paying your bills, then a debt relief order may be a more appropriate remedy for you.
It’s like bankruptcy, in that it lasts 12 months, during which your creditors cannot pursue you to repay them and the interest is frozen on the debts. After the 12 months are up, if your circumstances have not changed, you are not expected to pay anything and the debts are written off.
The fees are cheaper than a bankruptcy petition. You must make an application through an authorised debt adviser. Again, certain debts can’t be included, and you can’t own assets over £2,000: for example, jewellery, valuable collectables or high-spec equipment such as a computer. However, tools of the trade that are essential for your work are exempt.
Always get advice
Most of the above remedies will appear on, or affect your credit file, for 6 years. Some debts cannot be added to the remedy application, and some may have a direct impact on your profession. It is always important to take specialist advice before embarking on a remedy that you believe is right for you.
Never pay for debt advice if possible. The key charities and organisations offering free assistance are:
National Debtline: https://www.nationaldebtline.org
Money Advice Service: https://www.moneyadviceservice.org.uk/en/categories/taking-control-of-debt
Citizens Advice: https://www.citizensadvice.org.uk/