The UK is a country in love with debt. On a personal level our love of plastic is almost as insatiable as the government’s love of printing money every time it gets in a jam. In fact, personal debt in the UK is now at an all-time high of £349 billion, or just under £13,000 per household. And that doesn’t include mortgages (in case you’re interested the number balloons to nearly £1,500 billion when mortgages are taken into consideration).
The government is no better off with a balance sheet that’s £1,900 billion in the red with that total increasing by £5,100 per second! Of course, it wasn’t always this way. As recently as the early 2000’s the government was actually running a surplus and as recently as 1980 personal debt was a measly 30% of GDP whereas now it’s nearly 90%.
The checkered history of debt in the UK, however, is typically of little interest to those struggling to balance their books and stay above water financially. They tend to feel overwhelmed by their circumstances, regardless of how they came about and aren’t really interested in historical precedents. And who can blame them? What they really want, above all other things, is not a history lesson but the ability to bring their situation under control without being shackled to a crippling repayment scheme.
That may seem like pie in the sky idealism, but is it? Or are there in fact legal ways to write off your debt and in essence start over? And if so, what are they? Below we’re going to take a look at some of the most popular forms of debt forgiveness and how they work.
Before we get into the vagaries of various debt relief schemes we need to state what many will consider to be the obvious: the first step in solving your debt problem is admitting you have one. The unsettling reality is that for everyone stressing over how they can dig themselves out of the financial hole there are typically 1 or 2 people who are in equally bad shape but simply refuse to admit it. They wilfully turn a blind eye to their predicament and continue to spend future earnings as though they’re going out of style.
This approach won’t ever lead anywhere good. If you’re going to get a handle on your debt you first have to admit you’ve overdone it and need help. Once you do that you’ll be more open to finding a solution regardless of what that entails. Now that we have that out of the way let’s have a look at ways you can write off your debt.
Let’s start by having a look at one of the more bizarre - but all too true - stories to have surfaced in recent years that has to do with the notion of writing off debt. This one came about as a result of negligence on the part of a few banks and quickly mushroomed into an urban myth that claimed as much as 85% of your debt could be quickly and easily written off.
Our tale begins back in 2008 with a minor change to banking laws that obligated banks to use different information on people’s loan statements. It seems that the change was so obscure and poorly publicized that many banks didn’t pick up on it and continued to conduct business as usual. As it turns out though, as long as these financial institutions were in non-compliance with the law they had no legal right to collect interest on the mortgages and other personal loans they were underwriting.
When they finally did catch on to the changes they were then obligated to refund the interest paid by customers during the period they were in non-compliance. As a result a fair number of people awoke at various points in time to discover hundreds and even thousands of pounds in interest payments had been credited back to their bank accounts.
As with many things, however, the story didn’t end there. Word began to spread through all the many websites dedicated to publicizing unsubstantiated rumours as though they were holy writ that, not only were the interest payments unjustified, but that if your mortgage was written using the obsolete language you were not obligated to pay it back. As you might imagine financial institutions took exception to this reading of the situation. What followed was a period during which they forcefully reminded borrowers that regardless of whether a loan application asked for the old type of information or the new the borrower was obliged to pay it back in full.
It took some time to more or less straighten the situation out, although there are still a few out there who haven’t given up hope that a minor omission on a loan application could mean hundreds of thousands of pounds in free money from the bank (for the record it won’t. Not today. Not tomorrow. Not next week.). So if this is the reed you’re clinging to in the hope that it will provide you debt relief, it’s time to let go and look at some of the real debt relief programs out there.
Now that we’ve hopefully helped put to rest the absurd notion that you can get out of paying back your mortgage if the bank asked a few inappropriate questions let’s get on to the business at hand: finding ways you can obtain true debt relief.
The most common way to get the debt hounds off your trail is to work something out personally between yourself and your creditors. The first step in doing so is to take stock of your situation and separate your priority from non-priority debts.
A priority debt is one which, if unpaid, could lead to your pay being attached or you being prosecuted. Mortgages, utility bills and taxes fall into this category. Other types of priority debts involve things you typically use to conduct your life’s business, like your car or mobile phone. Non-priority debts include things like credit card debt, unsecured personal loans and overdrafts.
Once you have a solid idea of the amount of your debt and how much is priority vs non-priority, the next step is to contact your creditors. Keep in mind that creditors want their money back so it’s in their interest to talk to you. There are some who will try to drive a hard bargain and others who will take a more conciliatory tone and work with you to find a solution everyone can live with. The most important thing is that you don’t hesitate to contact them out of fear or simple procrastination.
If you let your bills go unpaid while you try to come up with a solution of your own the creditors will assume you’re trying to skip out on the debt. When you finally do get in touch with them they’ll be less likely to negotiate as a result. So the sooner you contact them the better.
If you have a significant amount of debt that you’re simply unable to repay informal discussions with the creditors about stretching out payments etc probably aren’t going to work. You’ll likely need a more formal repayment/relief plan like one of the following.
The DMP is reserved for the repayment of unsecured debt only and is typically drawn up by a third party debt management company. It constitutes a binding agreement between yourself and the companies and/or institutions that are holding your debt. With the Debt Management Plan you have no direct contact with your creditors. Instead you send an agreed-upon sum to the licensed debt management company every month and that company distributes the money among your creditors. One distinct advantage of these debt management companies is that they sometimes won’t charge you for their services.
With the DRO we’re getting into straight up debt relief. The Debt Relief Order enables people with larger amounts of debt and low income to have their debt actually written off. The stipulations are that the debt must be less than £15,000 and the debtor must have less than £300 in assets and less than £50 in disposable income per month. The DRO requires a one-time fee of £90 and your creditors will be held at bay for one year after entering into the agreement.
If your finances improve during that 1 year period you’ll be expected to resume normal payments on your debt. If, however, your financial situation hasn’t improved in that year your debt will be relieved.
The DRO is a relatively new item on the list of debt relief options, making its initial appearance in 2009 in the wake of the global banking crisis. They were intended to provide people suffering through the aftermath of that crisis some breathing room and to help ensure the banks could recover as much bad debt as possible. The DRO worked so well that it’s stayed on the official books and is today a viable option if you meet the requirements.
The Individual Voluntary Arrangement or IVA is designed to give individuals whose lives are buckling under the strain of extreme debt loads a chance to restore some sort of sanity to their financial lives and repay at least some of the debt they’ve accrued. With an IVA you enter into a formal agreement with your creditors to make payments on your debt for an extended period of time; typically 5 or 6 years.
If you have kept your end of the bargain by making all your payments faithfully then whatever debt remains at the end of the payback period is written off. The IVA prohibits creditors from bothering you and at the end of the term it could potentially result in a significant amount of debt being written off.
It needs to be said, however, that entering an IVA is not all puppy dogs and sunshine. There may be a substantial setup fee as well as annual servicing fees involved. It will also mean you have very little disposable cash to play with for the life of the agreement. And if you own anything of real value like a nice car or shares in a publicly traded company you may be forced to sell them as well. In addition, it’s crucial that you abide by the exact terms of the agreement.
Miss payments or send less than the agreed upon amount and the IVA will be voided and you’ll be back where you started. The bottom line is that the IVA is not a quick fix or easy way out. So think carefully before entering into such an arrangement.
If your debts are so large that there is no conceivable way you can pay them off and there is no reason to believe your income will substantially increase in the near future, Filing for Bankruptcy may be your best or perhaps only choice.
Everyone is familiar with the term “bankruptcy” but few are actually aware of the implications of declaring yourself bankrupt. If the court has agreed to grant you bankrupt status your finances will be turned over to an official “Receiver”. Meaning that you agree to hand over control of your finances to someone else. The receiver may determine that you need to sell your house, condo, car and other assets and you’ll need to go along with their decision. But that’s not all.
There’s also a £680 fee for declaring bankruptcy so you may not be able to afford it. In addition, when you are declared personally bankrupt you will forfeit your right to run a business and will be ineligible for certain types of jobs. In fact, if you worked in the financial services industry declaring bankruptcy may cost you your job. Finally, the bankruptcy will remain part of your credit history for 6 years, so even after you emerge from the process you’ll still find it difficult to borrow money for a time.
While there are certainly significant downsides to declaring bankruptcy it’s a popular choice for those deeply in debt because there is also one very significant benefit. A year after being declared bankrupt your remaining debt will be written off. So even if you lost your car and condo during the bankruptcy you could still emerge with a substantial amount of debt simply being wiped from the records. Essentially you’ll be given a clean slate to start over with although, as we mentioned, you’ll probably find it difficult to obtain loans or credit cards until the bankruptcy is finally dropped from your credit history after 6 years.
If you live in Scotland and have personal debt that exceeds £8,000 you may be eligible to partake of a legally binding repayment agreement known as the Scottish Trust Deed. This is a Scotland-only initiative aimed at helping Scots obtain relief from their excessive debt.
The typical Scottish Trust Deed agreement lasts for a period of 4 years (although longer term agreements are not unheard of) and is not unlike the Individual Voluntary Arrangement or IVA that we outlined above. That’s because, like the IVA, if you’ve fulfilled your end of the bargain faithfully whatever debt remains at the end of the agreement period will be written off. Below are more specifics both pro and con related to the Scottish Trust Deed:
Your first step will be to make a real world assessment of your financial situation and determine if this is in fact the best solution for you. Consult one of the many debt counsellors out there who offer advice for free or at most for a minimal fee. If the debt counsellor agrees the Scottish Trust Deed is the right way to go the process will proceed thus:
If your Trust Deed is accepted and all of your obligations under it are eventually satisfied, a discharge letter will be issued to you and any remaining debt will be written off.
Every one of the debt relief solutions outlined above has pros and cons attached to it. And while one or another may strike you as the ideal, low-pain, high-gain way to rid yourself of your debt load the fact is it may not be. It’s vital that you seek the advice of an independent debt counsellor before deciding to sign on to one particular debt repayment method or another. Keep in mind that getting out of debt can be a long, trying experience. One that may see you lose prized assets and have little disposable cash available for perhaps several years. Finding the right solution though can make the difference between something that’s doable but unpleasant and one that’s simply unworkable and ends up with you right back where you started.
Another common urban myth that has been making the rounds for many years involves the Statute of Limitations on personal debt. The myth goes like this: if you simply wait out the creditors your debts will eventually be written off. If only things were that simple. The fact is that if you ignore your debt and start living the cash life those debts won’t simply disappear after 6 years. They’ll still be there, they just won’t be enforceable via the courts. However, if a creditor pursued the debt through the courts while you were living your credit free existence and received a legal judgment against you then there is no expiration on either the debt or the creditor’s ability to pursue it.
Trying to find relief from excessive personal debt can be an extremely stressful and disconcerting process. And as is often the case such situations have the tendency to attract sharks who smell potential blood. The unfortunate truth is that there are scores of unscrupulous, ill-intentioned scammers out there looking for a way to take advantage of your desperation. Don’t let them. If you see an advertisement where someone claims they can help you eliminate 85% of your debt or more give it a pass.
Others will claim that if you fill out a questionnaire and provide them with some personal information they’ll be able to get all your credit card debt written off. And of course there are still a few ne'er do wells about trying to make hay off the urban myth that you may not have to pay back your mortgage. “For a small fee we can show you how to have your mortgage repayment obligation voided!”
So the watchword when it comes to debt repayment and relief options is “caution”. It simply doesn’t pay to make rash decisions no matter how desperately you want the harassing phone calls to stop. Remember that it was likely a series of rash decisions that got you into this mess. More poorly considered decisions now will only make it worse.
Getting deeply in debt is usually a long-term process that involves a combination of over-indulgence, unrealistic expectations of future earnings, wilful ignorance and bad luck. If you are to get control of your debt problem and turn your life back toward a financially sustainable course you’ll need patience, persistence and a boatload of good advice.