Where to start
As soon as you start to feel you are struggling with your finances, it’s best to start thinking about how you can improve your financial situation. You may be able to improve your circumstances by completing a budget planner and limiting any unnecessary outgoings. This will highlight areas where you may be overspending, allowing you to try to cut back on costs and save yourself money. Anything you save could then be used to help manage your debt.
If you feel you’re in a situation where you need financial assistance or you are struggling with your repayments, try talking to your creditors as they may be able to help. Some creditors may help by offering things such as lower repayments, supporting with budget planning, and payment breaks.
We have outlined some alternative options when looking at how to manage your debt and explained how these work, such as:
- Consolidating your debt
- Entering a Debt Management Plan (DMP)
- Entering an Individual Voluntary Agreement (IVA)
- Declaring bankruptcy
They all come with their own risks and it is important you are fully aware of the risks, costs, and implications of choosing any of the following. We have also provided different sources of help should you need to talk further about your personal situation.
It is worth knowing that different Police Forces deal with employee debt differently and you should learn more about your employers approach to debt before choosing routes such as entering an IVA, DMP or declaring bankruptcy. If you are a police officer or member of police staff who encounters financial difficulties, you should disclose it in accordance with your force guidelines as it may affect your vetting status or certain postings. The Credit Union will not make disclosures to your employer unless legally required to do so by a police force.
What is debt consolidation?
Debt consolidation has helped a lot of people manage their debts without going into any type of debt management plan or arrangement. Debt consolidation consists of bringing all your existing borrowing together, into one monthly repayment. It usually means getting a loan equal to the value of your total debt (and ideally a lower interest rate) and using these funds to clear and repay all existing debt. Going forward you will then only be managing one monthly repayment.
The benefit is that it could reduce your monthly repayments and give you more disposable income. One of the drawbacks of debt consolidation is that you could end up paying more back if you take the loan over a longer period than your original agreement. A variety of banks, building societies, and credit unions offer debt consolidation loans to help you get your finances back on track.
What is a Debt Management Plan (DMP)?
This is the least formal debt plan, as it is an agreement between a debtor and creditor when usual contractual payments cannot be made due to financial difficulties. It is not legally binding and therefore 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 the Citizens Advice Bureau (CAB) 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.
If you default on your agreement your creditors could still pursue further legal action. They could also contact you to try and dictate changes within the agreement throughout the course of the plan. With this option, you could still face difficulty with your credit file as a default notice could be issued if you default during your DMP. This would stay on your credit file for 6 years from the date it was last issued. If you repay your DMP as agreed this will show on your credit file as an arrangement and once paid in full it will show as settled.
You can use a Debt Management Plan for the following reasons:
- Personal loans
- Bank or building society loans
- Money borrowed from family or friends
- Credit card, store card or payday loans
- Catalogue, home credit or in-store credit debts.
You can’t pay off court fines, Council Tax, gas and electricity bills, child support and maintenance, mortgage repayments or any loans secured against your home. To find out the full list you can check www.moneyadviceservice.org.uk/en/articles/what-is-a-debt-management-plan.
What is an Individual Voluntary Arrangement (IVA)?
If a DMP isn’t working out for you, or if it’s not plausible, 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. 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 the aim of it is to make sure all IVA’s are clear and fair. Please be aware that your creditors are able to 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 the rest you pay 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.
You need to ensure that you would be able to commit to a 5-year plan as your IVA could fail if you miss a repayment. This could lead to creditors petitioning for your bankruptcy. As with any financial agreement, it’s important to keep to the terms of the agreement as whilst in an IVA you are able to keep hold of your assets such as your house, whereas once you are bankrupt these assets could be taken away from you. 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 6 years after the IVA has ended. 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.
You can use an IVA to pay off the following:
- Personal loans
- Catalogue debts
- Council tax arrears
- Hire purchase debts
- Mortgage shortfalls (any remaining balance owed after repossession or sale)
- Credit and store cards
- Money you owe to HM Revenue & Customs
You are unable to pay off student loans, magistrates court fines, child maintenance or child support arrears and certain types of car finance.
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.
Can a creditor make me bankrupt?
The minimum level of debt to which a creditor can force you into bankruptcy is £5,000. It’s rare that a lender will make a borrower bankrupt as they often prefer to work out a repayment plan with you to pay off your debts.
Deciding what is best for you
We cannot advise on what is right for you as there are a variety of factors that can affect this decision. One example of this is depending on your chosen career plans you could be required to have a credit check which could show your previous financial decisions, which could then affect your chances of getting the job. We strongly advise that if you are experiencing financial difficulties that you speak to your creditor(s) first, to see if there are any options you can explore. If you are experiencing difficulty repaying your Credit Union loan, we encourage you to get in touch with us to see what we can do to help you. You can call us on 0161 741 3160, or email us at firstname.lastname@example.org where we will arrange to contact you and talk about your situation.
You may find talking to a Debt Adviser could help you sort out your finances, as they can give you impartial advice. There are a variety of Debt Advisers, but we suggest that you talk to a free of charge adviser. This would mean if you were to go into one of the above plans that all your repayments would go towards your debt. It’s important that even if you are to choose a fee-paying provider that you ensure they are authorised by the Financial Conduct Authority (FCA) to ensure they meet the agreed standards.
Here are a few free services you can use:
StepChange Debt Charity
www.stepchange.org or 08001381111
www.mymoneysteps.org or 08088084000
www.payplan.com or 08002802816
Debt Advice Foundation
www.debtadvicefoundation.org or 08006226151