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How to clear personal debt in the Uk

When dealing with personal debt it is important that you find the best solution available for you.

There are four main ways to clear your debt and your current personal circumstances will determine the best route for you to take.  If you can pay more than the minimum payments required on your credit commitments or a family member can lend you the money, this can often be the  most preferred course of action regarding personal debt help.

BANKRUPTCY

Bankruptcy is available to people who have no reasonable ability to clear debts over a reasonable period of time.

This means that they have little or no disposable income to distribute amongst their creditors based on their current income and expenditure or monthly outgoings.  

For example, it would be better to wipe away the problem rather than repay the unsecured debts over a 30 - 40 year period of time.  

It is sometimes the best solution to clear debts dependant upon how much you owe and how much you can afford to contribute to repay at the particular time. 

Bankruptcy is not ideal if you have any assets such as a home or savings as these could be affected during the bankruptcy petition.

There is usually a cost of approximately £500 to declare yourself bankrupt and you can get more information from your local county court office.

IVA or INDIVIDUAL VOLUNTARY ARRANGEMENT 

IVA, this is a government approved scheme designed to make it easier for people to clear their debts within a fixed period of time.  The number of people actually being classed as insolvent has risen sharply and the IVA is accepted as another alternative prior to bankruptcy.  

It consists of a fixed repayment period of 5 years and the interest and charges have to be frozen by law.  During which time, no creditors are allowed to contact the client by phone or in writing.

Insolvency is an alternative to clear debts in severe circumstances and was mainly introduced to prevent people from having to declare them self bankrupt.   The creditor will still receive a large part of the money owed. Usually people can enter an IVA with a debt level of £15k or more and the debtor will have to commit to a fixed monthly payment of what is affordable over the 5 year or 60 month period.

This will be worked out to achieve a pence in the pound repaid by the debtor which is usually more than 50p.  The remainder of the money owed will be written off.  The agreement is legally binding, so if the debtor defaults on the arrangement the creditors can legally petition for their bankruptcy.

This may not be the ideal route if the debtor wants to keep their debts away from their home as the creditors may make you release equity during the agreement to top up contribution they receive.

DEBT CONSOLIDATION LOANS

Debt consolidation loans are another way to clear your personal debt. In most cases people who have a lot of equity in their property often find it easier to release the cash rather than find an alternative solution.   A secured loan, which is money that is secured against a property or home,  is another way to clear your debts.

However, there is a risk to doing this as you are consolidating unsecured credit against your property so if you have a further change in circumstances your home will be at risk.  Debt consolidation loans are available on an unsecured basis but are often very expensive when calculating the total repaid.

DEBT MANAGEMENT PLANS

Debt management is an informal solution to clear personal debts.  It consists of a restructured repayment plan with your creditors.  It is ideal for someone who is overcommitted but expects their circumstances to change for the better in the near future.

The client is in control of the programme as there are no legally binding contracts.  The client can restructure their debts so it is made affordable to repay. The debtor has to mentally commit to making one monthly payment based on their affordability.  The payment is then distributed to the creditors on a pro rata basis.  This means that all the creditors will receive a fair split of the clients monthly money with the largest share going to the creditor owed the largest amount.

Interest and charges may stop at the discretion of the creditors and is not guaranteed. Debt Management has proved to be a successful way of clearing debts because of its informal nature as it enables the client to be in control to increase their payments whenever they choose. As long as the balances are not increasing and are fixed, the client can pay more to clear the debt quicker however this is all based on circumstances. Debt management plans also take into account changes in the home such as the cost of living increasing and this flexibility enables the client to maintain their household expenditure without falling behind, whilst still clearing their debts.

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