What to do if you can’t repay debt
Debt can cause major problems for people. It can also have a spiral effect, meaning that your financial situation can just keep getting worse. It has been the cause of many personal problems, including relationship damage, stress issues, mental health implications and even suicide in extreme cases. Part of the reason for this is that debt can easily be a long-term issue and there are rarely quick fixes out of it. So even when things are improving, it can sometimes still feel like there is no end in sight.
However, there are always options that can help in situations like this. We’re putting this guide together because we believe that there are situations where short-term loans aren’t part of the solution, so we want to highlight some options that may be able to help, as well as a guide to the kinds of debt that you can get into.
KINDS OF DEBT
Debt can come from anything that you regularly pay money into and have a way of getting behind on. Most of these will be likely to show on your credit report too.
These aren’t always the most obvious forms of debt, but they’re still one that can cause major problems over time. Bills like gas, electricity and so on can be easy to get behind on. Once that backlog starts building up, it can become more and more difficult to clear.
Luckily, most suppliers are now far less likely to cut you off than they used to be. However, this doesn’t mean that you can’t be charged penalties for non-payment. The debts can also be passed to debt collectors.
Also, while your utility bills don’t show up on your credit report, unpaid utility bills can. With bills like these, it’s usually best to put them on direct debit in order to keep on top of them.
If you don’t have your utility bills set up to be paid immediately after you receive your wage, it’s worth considering – not least because it can help avoid the illusion that you have more money available to spend than you actually do.
This is worth separating out from other household bills because it varies so much depending on the local borough council. Some will treat it like any other utility provider would, whereas others will be far more aggressive, adding penalties and potentially moving it to debt collectors more quickly. It can also lead to court implications faster than some other debts, again depending on the borough and their attitude towards debt.
If you are having difficulties repaying, you should contact your local borough immediately. It may also be that you are entitled to a reduction in your council tax that you’re unaware of, so it’s worth doing on that basis anyway.
Overdrafts can be very useful things, as in the long run, they can be cheaper than many loans, especially if you repay them regularly. There will be an interest charge, although if you repay the entire thing, it’s a lot cheaper.
However, they can be long-standing debt, and it’s important to be aware that the bank can withdraw them at any time. It’s also worth bearing in mind that overdrafts do have limits, which will be agreed with you when you first take it out. At their discretion, banks can allow you to go over this limit, but you will usually receive a charge to do so. This can be up to £5 a day, depending on the bank. This is referred to as an unauthorised overdraft.
Credit cards can be particularly difficult, as they are very easy to keep using. With a credit card, you have access to funds, on which you are charged a monthly interest rate. If you repay them in full each month, then you don’t need to pay interest on top of that. However, the more debt you allow to accumulate, the more interest you will need to repay.
The most difficult situation occurs if you max out the credit card and can’t repay the owed amount. This can lead to a situation where you’re paying off the minimum interest, which is immediately earned on the account again. This can effectively mean that you’re paying just to keep a debt – so you end up having tens or hundreds of pounds going out of your account each month, but not actually making any difference to the amount you owe overall.
Whether it’s a short-term loan or a longer-term loan, all types of this kind of credit work in roughly the same way. You are loaned an amount of money for an agreed amount of time and you repay it with interest. The amount of interest you repay depends both on the lender and the amount of time that the loan is for.
With some loans, there will be a minimum amount of time that you have to take the loan out for, as otherwise, it’s not profitable for the lender to give you the loan in the first place. Others may have a penalty for repaying early for the same reasons. At the same time, some loans don’t have any extra charges for early repayment.
WHAT SHOULD YOU FOCUS ON FIRST?
When you’re dealing with multiple forms of debt, the rule of thumb is always to concentrate on the ones that are costing you the most or the ones with the biggest penalty if you do not repay.
As an example, let’s say that you have two different debts. One is for a large amount of money and you have had that debt for some time. Interest is growing on it every month. The other is for a smaller amount of money, which has no interest and is remaining constant.
For some people, the inclination may be to pay off the smaller debt first. After all, it’s easier to pay off and will be removed from your debt plan altogether. Once that’s paid, the larger debt can be started.
While there is a logic to this, it’s more emotional logic. There’s an element of it being strongly motivational. It’s a good start and there’s something visible and complete taken off the debt plan. And if that works for you, that may be a good reason to consider that. We are all different, of course, and all will find different ways that work for us.
However, realistically, the smaller debt is less important. It’s just less work to deal with. But while you’re putting money into that debt, the larger debt is continuing to cost you more.
If the larger debt is something like a credit card, then you can also take out the minimum payments from your budget. The more of this debt that you pay off, the less interest you will need to pay on the debt, which will just free up more money.
If it’s ignored, then the debt continues to cost you more. It may be painful and it may be slower, but if it’s a choice between making a payment to a growing debt or making a payment to a dormant debt, it makes better financial sense to repay the debt that is growing.
However, there are debts that can escalate more quickly in ways other than money. Debts that can lead to you losing essential services (such as utility bills), losing possessions or property (such as mortgages or hire purchases) or leading to court (such as council tax) should also be prioritised.
So, to recap:
You should always put the most focus on the debt that is going to cost you the most, either in terms of loss, penalty or money.
WHAT OPTIONS DO YOU HAVE?
Contact the lenders
Generally speaking, the first thing you should do if you’re having difficulty is to contact your creditors. They may take an understanding approach and agree to pause the interest or reduce the amount you need to repay. They may agree to reduce your payments. Of course, they may not agree to any of this and insist on full repayment, but at least this way you know where you stand – and without knowing where you stand, you cannot make a start on dealing with the situation.
If they are willing to negotiate or agree to reduced payments (even over a longer period of time), this is known as an ‘informal arrangement’. Many creditors are willing to do this, but it is entirely at their own discretion, so they may choose not to.
If they are not willing to negotiate, you should seek advice elsewhere as to how to proceed futher.
Free debt advice
There are a number of places you can go to get free advice with regards to debt. Some of these may be able to help you work out what your options are, as well as advise you as to how best to go about dealing with your creditors.
Money Advice Service – where to get adviceAdvice will obviously depend on your situation, but here are some of the things that they may suggest:
- Repay in instalments
They may be able to help you negotiate a deal with your creditors. While this is something you may be able to do in your own right, the extra advice may help you in making your case. If this is the case, interest will sometimes be frozen, but it may also be simply applied over a longer period of time or lowered.
What you will sometimes be able to do is arrange to repay the debt in instalments, making it more affordable than being expected to repay it all in one go.
- Official arrangements
These can be set up legally if you meet the criteria involved. They include administration orders, individual voluntary arrangements and debt relief orders. What you can apply for will depend on how much you owe and how much you can afford to repay.
Usually, these freeze your debts and allow you to repay over a period of time (up to five years, depending on the type of arrangement). They will usually go through a third party – a court with debt relief and administration orders or an insolvency practitioner for an individual voluntary arrangement.
With these, you’ll need to pay a percentage of your earnings towards the debt, but they can help to keep control overall and even reduce the amount of debt.
- Third party arrangement services
There are third party companies that deal with debt advice and can help you to deal with your creditors. While you will be able to do a lot of the things that they offer yourself, they may be able to help you do it more quickly – also, because they deal with a lot of the same lenders, they’re experienced in negotiating with them.
In most cases, they will set up a single payment – which goes through them – and will pay creditors on your behalf. The amount of the payment will usually also include payment to them for this service. If you are interested in this option, make sure to check the terms and conditions carefully, so you are fully aware what you are signing up for.
- Declare bankruptcy
This is an extreme measure and shouldn’t be taken unless necessary. It’s something you can either apply to do or your creditors can apply for on your behalf, depending on how much you owe.
If you are declared bankrupt, your assets (including your house and possessions) can be sold in order to pay any debts. It can, depending on your job, also have severe implications for your career, as some employers will not allow a bankrupt employee to keep their job. There are also costs involved in declaring bankruptcy, which can be up to around £700 (and that’s not including solicitor fees).
After an agreed length of time, you’ll be able to make a fresh start, as most of your debts will be written off. However, the bankruptcy will remain on your credit reference file for six years, which could affect future applications for credit. Bankruptcy is a public act, so will be on the record. An official receiver will take control of your money and property in order to deal with your creditors. The biggest advantage to bankruptcy is that it can be a chance to restart and remove some of the stress of the current situation. The bankruptcy will also make sure that you are able to afford to take care of yourself in the opinion of the receiver. That said, it can have serious implications, so should be very carefully considered.