Spotting Debt Problems – and taking action
Debt isn’t necessarily a problem. Millions of people have mortgages, loans, overdrafts and credit card debts that aren’t the slightest threat to their financial stability. Debt becomes a problem when it becomes unmanageable…
So how can you tell a debt is becoming unmanageable? There’s no fixed amount of debt which is dangerous, as it depends on how much you earn, spend and need. However, there are certain warning signs, such as paying your household bills with a credit card because you need to (not just because it’s convenient), or never being able to pay off your credit card debt, or putting off paying bills until you receive the final demand.
Taking action
Once you’ve spotted a potential problem, the important thing is to take action sooner, rather than later. Start by getting some professional debt management advice and seeing what the adviser recommends.
Once you’ve explained your situation, they’ll take a look at the figures and help you decide if you can bring your finances back in line by making a few cutbacks, or if you need to go further. They may suggest a professional debt solution, such as debt consolidation or an IVA (Individual Voluntary Arrangement).
Debt consolidation
If you’re paying off multiple unsecured debts, you may be able to pay them all off with one large loan known as a debt consolidation loan. This can come with a lower interest rate than the loans you’re paying off, especially if they’re high-interest debts such as credit cards.
Debt consolidation also gives you a chance to re-think the way you’re repaying your debt – for example, if you’re worried about keeping up with your monthly payments, you could arrange to repay the consolidation loan quite slowly, reducing the amount of each payment. Of course, repaying the debt more slowly would probably mean it costs more in total, as it would spend longer accruing interest.
IVA
If you owe around £15,000 in unsecured debts or more and there’s simply no way you can keep up with your debt repayments, an IVA could be the answer.
It’s an agreement between you and your creditors: basically, you agree to make regular, fixed payments (as much as you can afford after taking your essential living costs into account) for the duration of the IVA. In return, your creditors agree to accept those lower payments, not to take any (further) legal action against you, and to write off any outstanding debt at the end of the IVA. In most cases, this is five years.
An IVA will, however, affect your ability to get further credit for a period of six years. And before it can start, it must be approved by creditors who collectively ‘own’ 75% of your debt.
