Getting into debt can happen to anyone.
Divorce. Redundancy. Illness. These are just some of the life events which can overwhelm us, leaving us unable to pay household bills and repay credit cards and loans.
Some things are difficult to anticipate, and we may find any savings we have inadequate at such times. Indeed, many borrowers just don’t have sufficient savings hence their need to borrow through a credit card or loan in the first place.
So, what should you do when you can’t settle your debts?
Do not despair. There are practical options to deal with arrears and debt.
To borrow or not to borrow
It’s a knee-jerk reaction - wanting to borrow more to help pay off your debt. In some cases, it may be appropriate to take out a consolidation loan (learn more).
But in many circumstances, trying to borrow more and consolidate debts with a loan can get you into further trouble.
Borrowing is the wrong decision when...
1. You have a poor credit rating
If you have a poor credit rating, you’re more likely to be rejected for credit. Further failed applications will continue to negatively impact your credit score, making it even harder to obtain affordable credit in the future.
Read our blog - 10 Ways to Improve Your Credit Score - to learn more about credit scores and how to improve them.
2. You've regularly missed repayments or are in arrears
When you can't meet your repayments, you’ll go into arrears with your creditors. Because credit reports detail your credit history, other possible lenders will be able to see that you are in arrears or making late repayments. Identifying this financial stress will negatively impact a lender's decision when accessing loan applications and will further reduce your credit score, leading to limited and expensive borrowing options.
3. You have a County Court Judgement (CCJ)
If you receive a CCJ, the creditor has decided to take legal action against you to recover the debt. CCJs stay on your credit reports for 6 years unless you pay the amount within a month. You can get a CCJ for as little as £100. You must not ignore a CCJ as this will negatively impact your credit score making it difficult to access affordable credit.
4. You are not fully engaged
You must be fully committed to clearing or reducing your debts. This will involve changing your habits and having a plan which actively manages your household budget over many years. If you are consolidating credit cards make sure you destroy the cards after clearing any balances, so that you are not tempted.
Acknowledging and dealing with debt
How you decide to manage debt depends on the amount of money you owe and your ability to repay. It's important to be honest with yourself and acknowledge that you have a debt problem; consider how best to move forward ensuring that you make careful and well-informed decisions.
1. Avoid the urge to do nothing
Many people feel overwhelmed when they get into debt. They think, "If I just ignore the situation, it will go away eventually" but this isn't the case. Ignoring debt will result in more debt and possible legal action like a CCJ, generating a cycle of anxiety and financial difficulty that grows increasingly difficult to escape from. What’s needed is informed action, and it’s much easier to do this if you feel supported.
2. Keep partners and family informed
There are two main reasons you should keep your loved ones informed about your debt.
1 - if it impacts them directly, they deserve to know what’s going on.
2 - it gives them an opportunity to support you during this difficult time, putting you in a stronger position to act.
3. Consider consolidating your debt
One option is to consolidate your debt by for example remortgaging your house or selling assets such as cars or other expensive items.
If appropriate you could take out an unsecured consolidation loan. This will allow you to settle multiple debts - such as credit cards, store cards and overdrafts - so that you have one single manageable monthly repayment which is affordable.
4. Contact your Creditors
Creditors are often willing to negotiate and reduce your payments or the interest on your loan or credit card. The key to this is honesty as both parties have a mutual interest in finding longer-term solutions. Creditors also understand that, in many cases, financial difficulties are unavoidable and will do what they can to make repayments more affordable under the right circumstances.
5. Consider help from a Debt Management company
If you do not feel comfortable contacting creditors, a debt charity like StepChange or Citizens Advice could act on your behalf. These organisations can also help create a Debt Management Plan (DMP) and manage it with you. Remember it will often take many years to settle your debts so be prepared as DMPs are rarely short-term.
However, if a DMP is not appropriate there are other more complex debt solutions that can be considered and may be recommended by debt advisors as follows.
Individual Voluntary Arrangements (IVA)
An Individual Voluntary Arrangement (IVA) is an agreement with your creditors to pay all or part of your debts. You agree to make regular payments to an insolvency practitioner, normally over 5 to 6 years, who will then divide this money between your creditors. The insolvency practitioner will contact your creditors and the IVA will start if the creditors holding 75% of your debts agree to it. It will apply to all your creditors, including any who disagreed with it. An IVA will stop your creditors from acting against you for your debts.
However, many debtors do not understand the IVA process and simply sign on the dotted line to implement what they think is a debt-free agreement. Initially, the individual may feel the benefit by paying the agreed sum into the IVA agreement every month and not having to worry about creditors chasing them. However, over time, we often find that debtors become frustrated with the payment given over 5 to 6 years.
Fees for an IVA are very high and can amount to thousands. Additionally, if the IVA fails this is added to the individuals’ debts.
The damage to your credit rating is also dramatic as an IVA is a form of insolvency (i.e. bankruptcy) and your credit report and score will be badly affected and will not recover for 5 or 6 years. So, always read the small print when considering an IVA and think very, very carefully about whether you’ll be able to repay the agreed amount over the extended period.
Declaring personal bankruptcy is when you enter a Debt Relief Order (DRO) where, essentially, you pay back what you can, and then your debt is written off over a year.
Bankruptcy is considered a last resort for a good reason in that for twelve months you will not be able to borrow for, credit cards, loans, mortgages even phone contracts and car leases. It may also impact your ability to secure employment in certain sectors.
GMBCU is here to help
The impact of IVA’s and Bankruptcy is long-lasting as they remain on your credit report for six years. This brings us back to why it’s so important to avoid over-committing yourself financially. If you do become burdened by debt you must take early action to avoid spiraling out of control as the consequences and the impact of debt and the debt solutions increase in severity the longer you leave it.
Credit Unions are not regulated to offer debt advice. However, it is part of our commitment to offer fair, flexible, and affordable lending and to ensure that our members make better financial decisions. We will not overburden our members financially.
If we see evidence of financial stress in members, we will do everything we can to support these members by reducing or extending repayment periods on their Credit Union loans. If a member's debt problem is on a wider scale, we will then signpost members to reputable organisations such as StepChange who offer tailored debt solutions.
The process starts by sharing information, as we have done in this article. If you’re a GMB member and you’re looking for trusted information, head to over to our blog page. To discuss consolidation loans, call us on 0161 486 1777 or email us at firstname.lastname@example.org.