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Business

Catherine Furze

Step-by-step guide to dealing with debt in the cost of living crisis

HMRC StepChange Prison

March 20-26 is National Debt Awareness Week, and this year charity StepChange is focusing its attention on people who need debt advice for the first time in the cost of living crisis.

The toxic cocktail of spiralling energy bills, rising food costs and rising mortgage rates have meant that many households are struggling to stretch their income to meet their outgoings - and plunging into debt just to make ends meet. A survey by credit management company Lowell found that one in five (22%) Brits claimed that the cost of living crisis is having an impact on them accumulating debt, but 32% of people find it too uncomfortable to discuss finance issues.

John Pears, UK managing director of Lowell UK said “The cost of living crisis is having a huge impact on many households, and in such an intense financial period, we want to ensure that people are as well-equipped as possible to handle and discuss their finances, so that they don’t have a heavy influence on accruing debt. We want to help break down the stigma surrounding money and people asking for help because it’s very difficult to learn about money matters when you’re discouraged from talking about them."

A spokesperson for StepChange, which has helped 1.6m deal with their debts since it started in 2015, said: "With the rising cost of living, we're finding that many of the people who come to us for help are experiencing financial difficulties for the first time. This might be you, because debt can happen to anyone."

Here we take a look at the steps you can take if you are struggling financially and the different solutions which may be available to you.

1. Prioritise your debts

'Priority debts' are debts that can cause you particularly serious problems if you don’t do anything about them. These are the debts that need to be paid first, regardless of which organisation is putting the most pressure on you to pay. Some of these debts are only priority in certain circumstances.

You should try to make an agreement with your priority creditors before you explore any debt solutions. If you can’t make an agreement with them you should still pay them what you can afford, but this might not stop them taking action against you.

If you are struggling to meet these debts, contact StepChange or Citizens Advice for help:

Rent arrears: Your landlord might evict you from your home if you don’t pay
Mortgage arrears or arrears on a secured loan: Your bank or building society might evict you and take your home if you don’t pay.
Council Tax arrears: Your council can take you to the magistrate’s court if you don’t pay. If you have the money but choose not to pay when the magistrate’s court tells you to, you could go to prison. You won’t go to prison if you can show you can’t pay.
Energy bills: If the debt is with your current supplier it’s a priority because they might cut off your gas or electricity if you don’t pay.
Phone or Internet bills: Your supplier can cut off your phone or internet if you don’t pay. They're only priority debts if it’s really important that you can use a phone or the internet.
TV licence: You could be fined by the magistrate’s court if you watch TV without a licence. If you have the money but choose not to pay a court fine, you could be sent to prison. You won’t go to prison if you can show you can’t pay.
Court fines: You could be sent to prison if you have the money but choose not to pay. You won’t go to prison if you can show you can’t pay.
Overpaid Tax Credits: If you don’t pay, HMRC can take the money from your wages, benefits or tax credits or use bailiffs to take your property. HMRC will warn you if they’re going to do this but they don’t have to go to court first.
Goods bought on hire purchase: The creditor could take back the goods you bought. If you keep the goods in your home or you’ve paid back more than a third of the cost, the creditor has to go to court to do this. These payments are only priority debts if the goods you bought are really important, for example you need a car if there’s no public transport.
Income Tax: If you don’t pay, HMRC can take the money from your wages or use bailiffs to take your property. HMRC will warn you if they’re going to do this but they don’t have to go to court first.
Child Maintenance: The Child Maintenance Service (CMS) can take the money from your wages or bank accounts if you don’t pay. They’ll warn you if they’re going to do this but they don’t have to go to court first. If you have the money but choose not to pay, the magistrate’s court can take away your driving licence or passport for up to two years or send you to prison.

2. Talk to your creditors

If you have lots of debts and are struggling to pay, there are things you can do. You might be able to talk to your creditors and arrange a way to pay them, or make a formal agreement called a 'debt solution'.

You’ll need to decide what the best solution is for your situation. It’ll depend on things like:

The type of debts you have
The total amount of debt you have
How much money you can pay towards your debts

3. Get breathing space if you need more time to decide what to do

If you're not ready to use a debt solution or you can't afford to right now, the government-backed Breathing Space scheme could give you extra time. If you’re eligible, you could get 60 days of breathing space where your creditors can’t:

Contact you
Take action to make you pay
Add interest and charges to your debt

It covers most debts, including credit and store cards, loans, overdrafts and arrears on household bills.

4. Work out a budget to determine how much money you have left over after priority debts

If you have some money to pay your debts, you could arrange to pay off your debts over a few years. You might be able to get a debt management plan, an administration order or an individual voluntary arrangement (IVA).

If you don’t have any money to pay your debts there are still options that could help you. If you owe less than £30,000, you might be able to apply for a Debt Relief Order (DRO). If you owe more than £30,000 applying for bankruptcy might be an option.

Different debt solutions can affect your life in different ways. For example, they might affect your credit rating, mortgage or savings, or restrict the work you can do. Make sure you understand how you'll be affected before you apply for a debt solution.

5. Solutions if you have money left after paying your priority creditors

Debt management plan (DMP)

How does a DMP work: You agree to pay off your debts with one monthly payment to a DMP provider, which is an independent company which deals with your creditors for you and make your payments. How long your DMP lasts will depend on how much debt you have and how much you can pay off each month.

Is it right for you: Anyone can get a DMP - it doesn’t matter how much debt you have. You might be able to get a DMP if you can pay your priority debts but you’re struggling to pay other debts like credit cards and loans. You will need to pay at least £5 a month towards each of your debts.

Need to knows:

A DMP doesn’t usually include priority debts so might not help you if you’re struggling with your rent or Council Tax, for example
It can take a long time to pay off your debts if you’re only making small payments
Your creditors don’t have to agree to the plan and they can stop accepting it or ask for more money at any time - it isn’t a legal agreement
Your creditors can still contact you about the debts you owe
It could make it harder for you to borrow money in the future

How to get started: Don’t pay for a DMP - you can get one for free and it's best to go on recommendation from a debt advisor, such as StepChange or CAB.. If you pay for your DMP the DMP provider will take part of your monthly payment to cover their fees. This means less money will go to your creditors and it’ll take you longer to pay off your debts.

Administration order

How does an administration order work: If you have an unpaid court judgment, you might be able to get an administration order, which means you agree to pay off your debts with one monthly payment to the court. The court decides how much you have to pay and passes the money on to your creditors and deal with them for you.

Is it right for you: You might be able to get an administration order if you have more than one debt, owe less than £5,000 and have an unpaid county court or high court judgment

Need to knows:

Your creditors can’t contact you about the debts included in the order while it’s in place or take any action against you to get their money back. They also can’t add interest to the amount you owe them.
It could take you a long time to pay off your debts - the court might limit it to 3 years but this will depend on your situation
You don’t have to pay a fee but the court will take 10% of your monthly payment to cover court costs
It might make it harder for you to borrow money in the future
If you have rent or mortgage arrears, you could still be evicted from your property even if you include them in the order.

How to get started: You’ll need to fill in an application form and list all your debts. Then you’ll need to take it to the court and sign it in front of a court officer.

Individual voluntary arrangement (IVA)

How does an IVA work: You agree to pay off your debts with one monthly payment, usually over 5 years. Your IVA will be organised by a specialist, called an insolvency practitioner. This will usually be a solicitor or an accountant and they’ll deal with your creditors for you. You’ll have to pay the insolvency practitioner but the fees will be added to your repayments. Not all your creditors need to agree to an IVA for you to get one. You'll need the agreement of creditors who cover at least 75% of the total amount you owe.

Is it right for you: An IVA might be a suitable option if you have more than one debt and two or more different creditors, owe more than £10,000, have a regular income and can pay at least £100 a month towards your debts

Need to knows:

Your creditors can't contact you about the debts included in the IVA while it's in place or take any action against you to get their money back.
It can cost around £5,000, and the extra costs are added to your monthly repayments
You might have to remortgage your house near the end
If you can’t keep up your IVA payments there’s a risk you could be made bankrupt
You might have to use your savings and pension money to help pay your debts
IVAs cover most debts but won’t include debts like CMS arrears or student loans
It might be harder for you to borrow money while you have an IVA

How to get started: It's important you get advice before you get an IVA. You’ll need to find a specialist insolvency practitioner. You won’t be able to set up an IVA on your own. You can find a specialist insolvency practitioner in your area on GOV.UK

6. Solutions if you have no money left after paying your priority creditors

If you don’t have any money left after paying your priority debts and living costs, or you only have a small amount, you might be able to get a Debt Relief Order or apply for bankruptcy

Debt Relief Order (DRO)

How does a DRO work: You won’t pay anything towards the debts in the order for 12 months. At the end of the 12 months you'll no longer owe those debts. While the DRO is in place your creditors can’t ask you to pay any debts included in it or start any action against you.

Is it right for you: You might be able to get a debt relief order if you owe £30,000 or less, you have £75 or less left over each month after paying your living costs, you don’t own your home, you have £2,000 or less in savings and other assets, you haven’t been given another a DRO in the last 6 years and you’ve lived or worked in England or Wales for the last 3 years

Need to knows:

If you have a vehicle worth less than £2,000, you don’t have to include it in your assets. You can only exclude one vehicle from your assets and you can't exclude it if you only use it for work.
You might find it harder to get a DRO if in the last two years you’ve made payments to one creditor but ignored others, given away valuable things you own, or sold things you own for less than they were worth.
If it’s found that you made your situation worse, or acted dishonestly, you might be given a debt relief restrictions order (DRRO). A DRRO will extend your debt relief order so the restrictions last longer than 12 months.
If you don’t meet the criteria or give extra information when you’re asked for it, your application could be turned down
It costs £90 to apply - you can pay this in installments but you won’t get it back if your application is refused
It won’t cover all debts - you'll still have to pay back child maintenance arrears, court fines, student loans, social fund loans, personal injury compensation and any debts caused by fraud
If you have rent arrears in a DRO your landlord can’t force you to pay what you owe, but they can still try to evict you
It might make it harder to borrow money in the future
You’ll have to tell the creditor about your DRO if you want to borrow more than £500 during the 12 months
You won’t be able to set up your own company or be a director of another company, even under a different name, without the court’s permission

How to get started: You’ll need to apply through an authorised debt adviser, called an 'approved intermediary'. You won’t be able to apply for a DRO on your own. They should help you gather the information you need to apply for a DRO. They also have to check you meet the rules to get a DRO, explain how a DRO might affect you, explain your responsibilities when you have a DRO and apply on your behalf.

Bankruptcy

How does bankruptcy work: You might be able to apply for bankruptcy if you can't pay your debts and the amount you owe is more than the value of the things you own. You might be able to declare yourself bankrupt if you can't pay your debts and the amount you owe is more than the value of the things you own. The bankruptcy period usually lasts 12 months. If you go bankrupt, most of your creditors won’t be able to contact you about your debts or take you to court.

Is it right for you: Bankruptcy can have far-reaching effects on you possessions, including your home, and might make getting work difficult in certain sectors. It might affect things like your home, belongings and bills. If you're earning and have a small amount spare, you might be asked to make payments towards your bankruptcy debts.

Need to knows:

If you’re applying to stay in the UK or become a British citizen, bankruptcy could have an impact on your immigration status or any application you're making for British nationality.
You'll need to pay £680, which you can pay in installments, but you'll need to pay the whole amount before you submit your bankruptcy application.
If you own the home you live in, the official receiver might want to sell it to help pay your bankruptcy debts.
When you go bankrupt, you can keep enough money for day-to-day living costs. You can usually keep your pension as well. If you earn more than you need for day-to-day living costs, you’ll need to pay the rest towards your debts.
Once a bankruptcy order is made, any bank or building society accounts you have are usually frozen immediately.
You might still have to pay some debts like court fines, student loans and child maintenance arrears.
You bankruptcy will be published on two Government websites that list people who have gone bankrupt. The websites are called the Insolvency Register and the Gazette.
After you’ve gone bankrupt, an ‘official receiver’ checks if you did your best to avoid bankruptcy. For example, they check if you paid some debts before others or spent or borrowed much more than you needed to. You can still go bankrupt if you’ve done these things, but you might have to follow the bankruptcy restrictions for longer.

How to get started: You can apply for bankruptcy online here and this will start the process for you.