Debt is a universal language regardless of the country or financial system that you live in. Owing creditors a substantial amount of money can feel like a scary and daunting situation. It may also feel like a situation that you will never get out of. But there's hope: there are debt solutions available that can help end the nightmare and begin the path toward a financial resolution. If you find yourself dealing with serious financial issues, understanding your options is the first step to recovery.
Debt Management
For those who aren't in major trouble but can see the debt beginning to stack up, managing it is the most effective method. No matter how much debt there is, digging yourself out is always possible. It just takes discipline and time.
With debt management practices, a person can begin to assess their debt and make payments toward getting that amount paid down. The most effective way to do this is to set a budget. Know what your bills are, know what your income is, and know what you can afford toward paying down your debts. Even if you can make slightly more than the minimum payments each month, you should begin to see your bills being paid down much quicker, freeing up additional funds to tackle other debts.
There is also a common debt management method known as the snowball effect. It involves paying off your smallest debt first and then using the monthly payment from that bill toward your next lowest, and so on. The idea is that your monthly budget doesn't change because you are still paying the same overall amount, but you end up paying down your debt at an accelerated rate.
Pro Tip: Set Up a Budget First
Before choosing any debt solution, create a detailed budget. Track every pound coming in and going out. This will help you understand your true capacity to pay and inform which debt solution is right for you.
Make an Arrangement with Creditors
Depending on the debt involved, your creditors may be willing to work with you on your current debts. This is because getting any kind of money out of a delinquent account is better than getting nothing at all. Creditors want some kind of monetary compensation.
In the event of a foreclosure on a home, calling the lender can help you avoid being foreclosed on. Selling the house is not something they are interested in, and they may be willing to make a change to your monthly payment arrangement.
The key here is to be proactive and contact your creditors before there are major issues. If you are aware of a major financial change or another reason that would cause you to fall behind on your bills, get ahead of it. Talking to your lender or creditor may not prove to be fruitful, but you may be pleasantly surprised at just how many of them will be willing to work with you.
Partial Settlement
When one falls far enough behind on their financial obligations, there is a chance that the creditor will send that bill to collections. This is where a collections company buys your debt from the original creditor and then attempts to collect it from you.
When an account is in collections, the best idea is to pay that account in full. This will reflect much more positively on your credit report. But if your debt is becoming out of control and you just want to get these accounts closed, then a partial settlement may be what you need.
A partial settlement involves calling the collection agency to set up an alternate arrangement. More often than not, debt collectors will offer a discounted rate to be paid at once in hopes of getting something for their investment. The benefit here is that you can pay off a collections account at a discounted rate from the full amount.
Warning: Partially paying a collections account can show up negatively on your credit report. Be aware of this before looking into a partial settlement, and consider speaking with a debt advisor first.
Debt Relief Order (DRO)
A debt relief order (DRO) is another possible alternative when it comes to debt solutions. It is most ideal for those who are looking to have their debts written off, but those people generally have a low amount of debt and even fewer potential assets that can be frozen.
A DRO is meant to freeze any debt repayments and interest that you have for 12 months' time. The idea here is to allow you to improve your financial situation enough that making those payments becomes a reality once again.
A DRO is meant to give those individuals a chance to better their situation and make their debt obligations without serious damage to their credit. If, at the end of that 12-month period, your financial situation hasn't changed and you still struggle to pay your bills, all of those debts that have been included in the DRO will be written off.
Individual Voluntary Arrangement (IVA)
Another option for debt relief is through an individual voluntary arrangement. This is the method of coming to an agreement with your creditors to make payments toward some or all of your debts. The party taking out the IVA agrees to make regular payments to what is known as an insolvency practitioner. The practitioner will divide the payments between the creditors owed.
The positive here about an IVA, as opposed to bankruptcy, is that it gives you a little more financial freedom and control over any assets that you may have. When things such as cars and homes come into the equation, losing them can be even more devastating than the debt arrangement.
An IVA not only allows you to make good on some, if not all, of your debts, it also stops your creditors from taking any type of action against you to collect those debts. That can be a huge stress relief by itself.
Bankruptcy
Filing for bankruptcy is not to be taken lightly and should be considered the very end of the line when it comes to debt resolutions. Bankruptcy will completely wipe away your debt (in most cases) but it will also completely demolish your credit for a long time to come.
Bankruptcy is for those who have tens of thousands of pounds in debt and cannot afford their current payments in any way, shape, or form. Getting back on track is simply not an option under the current circumstances.
A bankruptcy does have its upsides. The first is that it allows you to get a fresh financial start. It also stops the creditor phone calls and can even allow you to keep some exempt goods. This includes household items, a car to get you to work, tools you need to do your job, and more.
There are serious detriments to this process, though. Your credit rating will be impacted heavily for six to seven years. If you currently rent and your landlord becomes aware of the bankruptcy, they could end your tenancy. For those who make a healthy enough income, there is a chance that you will be required to make payments toward your debt for three years.
Take Action Today
Don't let your debt become overwhelming and dictate your entire life. Take the appropriate actions to get your credit score and debt situation back where you want it to be and start to feel financial freedom once again. Even if it feels like a bleak situation, there is hope. It just takes knowledge and a little bit of effort, and you can begin down the right path as soon as today.
About iBudget
iBudget helps couples and families take control of their finances with simple, collaborative budgeting tools. Track spending, set goals, and build wealth together.
Start Your Budget
