I never thought that I’ll read through some of my old posts about how to pay off debt, and paying off debt, and think:
‘Gosh, I do come across as a sanctimonious halfwit. Where did all this missionary zeal come from?’
Okay, I know where it came from; the zeal came from my complete focus on paying off our debt. I spent three year, stalking the debt like a hungry tigress stalks a young gazelle.
Carried away by the excitement of the hunt, I seem to have forgotten that I’m not exactly what you’d call ‘a normal’ case.
Do you know what reminded me about this?
I published a guest article on Lazy Man and Money. Naturally, I did mention that by implementing the ERR strategy for money management we reduced our outgoings by about £2,000 per month (about $3,000).
Than someone left a comment that knocked what was left of my ‘high earning-high spending’ mentality out of me. This is what he said:
‘I don’t even net $3,000 a month. I already live quite frugally, watch all the pennies and dollars, know how to cook, can, shop, have a minimal carbon footprint. I splurge on what’s important to me (museum memberships, bicycles…) and have zero debt. When I read something like this, it annoys the hell out of me.’
Well, if I didn’t even make $3,000 per month and someone told me they shaved this off their monthly budget, it will annoy the hell out of me as well.
You see, sometimes we have to face some simple truths:
- We get in debt because we don’t earn enough.
- No money management system, irrespective of how good it is, will help if you just don’t earn enough.
- If you hardly earn enough to pay for your necessities, it is likely you can’t pay off your debt.
At least, you won’t be able to do the way I’ve been preaching on The Money Principle.
I have always stood for demolishing debt. Today, I’ll venture in the territory of manipulating it.
Here are your three basic options if you live in the UK.
Bankruptcy or Sequestration (if you are in Scotland)
One thing I remember from the day after we realised in how much debt we really are, is that I only wanted it to go away. All fight was knocked out of me by the nasty surprise.
Making all your debt go away is possible: it is called bankruptcy or sequestration if you live in Scotland. Tempting, isn’t it?
All your unsecured debts written off in an instant and no further calls from creditors, no bailiffs knocking on your door and no sleepless nights painting un-imaginable horrors and deprivation.
Thing is, bankruptcy (sequestration) is a very serious matter in the UK and has serious consequences for your life and career.
To begin with, it is an appropriate way to deal with debt only when you really can’t pay it off under any other conditions.
Next, going bankrupt in the UK means that all your assets may (probably will) be included in the deal; your assets may be sold to cover some of the debts. There is good news: pensions that are in ‘approved pension schemes’ won’t be included in the estate (you’ll be able to keep those). You are still likely to lose everything else, though. And, I know people who have gone bankrupt and their ‘new start’ is so much like the old one that got them in the whole mess to begin with.
Last but not least, going bankrupt in the UK means that you cannot hold certain jobs (you can’t be charity trustee, insolvency practitioner, justice of the peace, part of local or national government etc.). Even more importantly, you cannot be a company director: this means that you cannot start a company either.
You see, bankruptcy may seem like an attractive option when you are still in the shock of discovery.
Bankruptcy is a very serious debt option and has consequences you may regret. In the UK, it has to be seen as a last resort and decided only after consultations with insolvency and debt relief practitioners.
IVA or Trust Deed
IVA stands for ‘individual voluntary arrangement’ and means that you’ll be paying off your debt but at a rate (amount) you can afford. IVAs usually last for six years and at the end any remaining debt will be written off.
If you can’t afford to pay your debt, IVA is probably a preferable option than bankruptcy. During an IVA, you’ll be paying at an agreed rate you can afford, your creditors can’t contact you and can’t be increasing your debt and you can keep your house (if you own one) provided you keep up with mortgage repayments.
Naturally, being one of the more extreme way to deal with debt, IVA has some problems. These are:
- Doing IVA will completely ruin your credit score. You may think that this is not that important given the gravity of your situation but let me remind you that lately landlords have started using credit scores when deciding to lend their property. Just reminding you that credit scores don’t matter much only if you have somewhere to live and don’t need to borrow.
- Should the IVA fail, your creditors can backdate interest or even insist on making you bankrupt.
- You’ll need to live on a very strict budget till the end of the IVA. Now this, I don’t think is a bad thing if you use the experience to learn.
- Now, this is about your house. Remember I said that when going down the IVA route you can keep your house? Well, there is a snag. You can keep it but six months before the end of the IVA you’ll be asked to re-mortgage to release equity. This needs to be watched carefully.
Trust deeds in Scotland are similar to IVA. These are schemes appropriate for people who are struggling with debt over £5,000. After it is made sure you qualify, and you choose to go this way, you’ll be contacted by your Insolvency Practitioner who can set up and administer your Trust Deed; he/she also acts as a trustee who will work out what you can pay and negotiate with your creditors to accept the terms.
When the majority of your creditors accept, your Trust Deed will become ‘protected’ and your creditors won’t be able to take any further action against you.
When going for Trust Deed remember that your Insolvency Practitioner is, for the length of the trust which is four years, your best friend. And while this all sounds very complex there are people, like the folk at Scotlands trust deed, who are there for you.
Please, be careful when you are deciding whether or not to go for IVA or Trust Deed. Always discuss your options with qualified professionals.
Debt Management Plan (DMP) or Debt Arrangement Scheme (DAS)
A debt management plan (DMP) allows you to pay off your debts at a more affordable rate by making reduced monthly payments.
The way this works is that a debt management company will help you work out a ‘survival’ budget: this meets your basic bills but there isn’t much left for anything else. Any money that is left over is consolidated in one monthly payment to the company and it distributes it to your creditors.
Please, before you commit to working with a company check for any charges and fees: many debt management companies charge. There are some charities around (StepChange.org is one of them) that will set up and administer a plan for you for free.
Here are several other things you should be prepared for:
- You budget will be tight; very tight. Thinking about it, you’d have a powerful incentive to earn more (and tell your DMP).
- Some of your creditors may still pester you. If this happens, get in touch with your DMP people and they’ll offer support and advice.
- Your credit score will be affected and there is no ‘maybe’ about it. It will be affected and not in a good way.
- Make sure you know whether your creditors have agreed to reduce or freeze interest. This will save you a lot of disappointment if they haven’t and you realise that you owe more than you think you do.
- Reduced payments mean longer to repay the debt. There is no way out of this one: simple arithmetic. The good news is that you’ll be debt free one day; which is more than one could say when they are not paying their debt.
The Debt Arrangement Scheme in Scotland is very similar to the DMP. Under this, a debtor commits to a debt payment programme (DPP) which makes it possible to repay the debt based on disposable income.
You can’t apply for a DPP without having sought the advice and assistance of a money advisor (DAS administrator). A DAS can last any reasonable length of time depending on the amount of debt and the amount of disposable income.
When the DPP is submitted to the creditors all changes owed (including interest) are frozen provided the application is approved.
You will also be protected from any further action that creditors may wish to take against you.
Again, it is important to research this option carefully and to seek advice from knowledgeable professionals.
In this post I set out three options you can use when you can’t pay your debt. These vary slightly between England, Wales and NI, and Scotland though there are many similarities.
Please, choose carefully. Going bankrupt is not something one can decide lightly and from a position of relative ignorance: this can seriously mess up your life.
When considering an IVA or a Trust Deed it is important to read the small script and plan well ahead; failing that you may find yourself in a bit of a pickle at the end of it.
And if you decide to go for a DMP or a DAS, you’d better be prepared for a long slog.
Do you have experience with any of these? Please, do share.