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Thankfully the internet has plenty of free help from trustworthy sources for people who are struggling with debts. It’s even possible that you could see a percentage of the amount you owe written off, but any action you take needs to be considered carefully as it could affect your future finances.

Here’s everything you need to know about how debts work and what your options are if you find yourself struggling to write them off.

How do debts work?

When you borrow money from a bank or other lender, you sign a contract agreeing to repay that sum, plus any agreed interest, within a certain timeframe. 

If, for example, you take out a £10,000 loan over five years, you’ll be expected to make regular monthly repayments that will clear both the loan and the interest you owe within five years. 

If you miss a payment, you’ll have to pay a penalty charge on top of what you already owe. And if you stop paying altogether, it won’t be long before the lender takes action to recoup its funds, which could involve a trip to court – or even losing the roof over your head if it’s a secured loan like a mortgage.

Defaulting on your debt repayments will also make it harder to borrow money in the future as it damages your credit score, which lenders look at when deciding whether or not to offer you a mortgage, loan or credit card.

That’s why it’s best to seek help – either by talking to your lender or by contacting a free debt advice service such as – as soon as you realise you can’t cope with your debt repayment levels. 

What are the different types of debt?

What happens when you are unable to pay off your debts will depend on the type of arrears you have. The most common forms of debt in the UK are:

• Secured loans, such as mortgages and car finance agreements. These are secured against a valuable item, for example your home or your car, which you stand to lose if you miss too many payments

• Unsecured loans, also known as personal loans. These are generally used to borrow £1,000 to £25,000 and last for between three and 10 years. Failing to repay them on time will mean extra charges, a lower credit score, and could result in a Country Court Judgement (CCJ) against you 

• Credit cards that allow you to make purchases and/or transfer balances from other accounts up to a certain limit. Again, non-payment of these will mean incurring extra interest and charges and could result in a CCJ

• Overdrafts that allow you to go below £0 on your current account up to an agreed amount. There isn’t usually a deadline for paying overdrafts off, but they often come with high interest rates, plus extra charges if you exceed your limit 

• Unpaid bills. These could be for anything from the rent to your electricity and can lead to hefty debts. And again, what happens as a result of non-payment will depend on the type of bill involved. Gas and electricity companies, for example, could eventually cut off your supply

How much debt is too much?

According to , people in the UK owed more than £1.74 trillion at the end of July 2021, pushing the typical household’s debt – including mortgages – up to £62,670. 

Per adult, this works out as £32,931, which is around 109% of average annual earnings. That’s way above the recommended debt to income ratio of 36%.

How do you know if your debts are becoming unmanageable? 

suggests asking yourself these five questions:

• Do you usually go up to or over the limit on your cards or overdraft?

• Have you borrowed more money to cover your debt payments?

• Have you considered or applied for a debt consolidation loan recently?

• Are you having issues paying your household bills?

• Have you borrowed following job loss, illness or an upheaval in your life?

If you answer yes to two or more, it’s probably time to seek debt advice and consider one of the many debt solutions available.

What is a debt solution?

A debt solution is a scheme or plan designed to help you pay off your debts at an affordable rate. 

In most cases, one of the main benefits is that you no longer have to worry about threatening letters and payment demands. 

Depending on the debt solution you choose, it may also simplify your life by allowing you to make one monthly payment towards all your different debts.

The right debt solution for you will depend on your individual circumstances, including how much you earn and how much you owe. Here’s our summary of the pros and cons of the various options available.

The “Breathing Space” scheme

If you live in England or Wales, your debt adviser can apply for temporary protection from your creditors while you get advice via a scheme called “Breathing Space”. 

Pros

• You can get protection for up to 60 days (or longer if you are having treatment for a mental health crisis) during which your creditors cannot contact you about your debts or add interest or charges to them

• It’s free to apply (although some debt advisers may still charge a fee)

Cons

• You’ll still need to make your debt repayments

• You can’t apply if you are already using a debt solution such as an Individual Voluntary Arrangement

• You can’t use the scheme more than once in 12 months (unless due to a mental health crisis)

Debt consolidation

Debt consolidation involves taking out new credit – such as an unsecured loan or a low-rate credit card – to pay off your debts, usually to reduce the amount you have to pay each month and/or the interest rate you’re charged. 

It can be a good option if you have lots of different creditors but are in a position to make a monthly repayment to repay them all.

Pros

• Can reduce the amount you have to pay each month

• Can make it cheaper to pay off your debts

• Simplifies your life by reducing the number of companies to which you owe money

Cons

• Can involve extra costs 

• May not be possible if you have a low credit score

• Could make a difficult situation worse if you continue to borrow

Debt Management Plans

A Debt Management Plan is set up by a debt adviser and is an agreement between you and your creditors to pay all of your debts.

It is a good option if you can only afford to pay creditors a small amount each month or you are struggling short term but expect to be able to make debt payments in a few months.

Pros

• Puts an immediate stop to payment demands and threats

• No further interest or charges will be added to your debts

• Has less impact on your credit score than other debt solutions

• Allows you to make affordable payments towards what you owe

Cons

• May involve charges

• Can only be used to pay unsecured debts

• Can be cancelled if you do not keep up your repayments

Individual Involuntary Arrangements 

An Individual Voluntary Arrangement (IVA) is an agreement to pay all or part of your debts, under which you make regular payments to an insolvency practitioner who divides the money between your creditors.

This debt solution is aimed at people with larger debts who want to avoid the longstanding consequences of becoming bankrupt.

Pros

• You no longer receive payment demands and threats

• No further interest or charges will be added to your debts

• You make one affordable payment per month

• You have more control of your assets than with bankruptcy

• You may still be able to run a business

Cons

• The creditors to which you owe at least 75% of your debts must agree to you getting an IVA

• You’ll generally have to pay a set-up fee 

• There may also be a handling fee for each payment

• You will be added to the (until three months after the IVA ends)

• You can be made bankrupt if you fail to keep up your repayments

Administration Orders

An Administration Order is a way to deal with debt if you have a County Court or High Court Judgment against you that you cannot afford to pay in full.

The court will decide how much of your debt you have to repay, how much your monthly repayments will be, and how long the arrangement lasts.

Pros

• You make one single payment a month to the local court, which is divided between your creditors

• Your creditors cannot take any further action against you without the court’s permission

• You may still be able to run your business, if you have one

Cons

• The total owed must be less than £5,000

• There’s a court fee each time you make a payment (of up to 10% of your debt)

• If you fail to keep up your repayments the court can cancel the arrangement or ask your employer to take the money from your wages

• You’ll be put on the Register of Judgments, Orders and Fines (until six years after the Order was made)

Debt Relief Orders

Debt Relief Orders (DROs) cost £90 and are one way to deal with your debts if you owe less than £30,000 and have under £75 in spare income each month. 

To qualify, you’ll also need to have lived or worked in England and Wales within the past 3 years and have less than £2,000 worth of assets.

Pros

• Your creditors cannot recover their money without the court’s permission

• You’re usually discharged from your debts after 12 months

Cons

• You can’t act as a company director or create, manage or promote a company without the court’s permission

• You can’t borrow more than £500 without telling the lender about your DRO

• You will be added to the Individual Insolvency Register (until three months after the DRO ends)

• The DRO will stay on your credit record for six years

• You could be made bankrupt if you get into further debt during the term of your DRO

Bankruptcy

You can apply to make yourself bankrupt if you cannot pay your debts, but this should only be considered as a last resort. The process is not the same if you are forced to go bankrupt and may vary in different parts of the UK.

Pros

• Your creditors cannot recover their money without the court’s permission

• You’re usually discharged from your debts after 12 months

Cons

• It costs £680 to apply for bankruptcy

• Your application could be rejected at the Insolvency Service adjudicator’s discretion

• Your assets can be used to pay your debts (even after the 12-month bankruptcy term)

• You can’t act as a company director or create, manage or promote a company without the court’s permission

• You can’t borrow more than £500 without telling the lender about your bankruptcy

• You will be added to the Individual Insolvency Register 

• Bankruptcy stays on your credit record for up to 10 years

Free debt advice

Struggling with debt can be a frightening and extremely stressful experience. but there is help available – and you don’t need to pay for it. For support and advice on the best way out of your debt problems, contact a free service such as: