Dealing with debt

With the economy still in relative turmoil, bankruptcies and severe debt problems are rife - get help from Money Saving Expert Martin Lewis

What should I do if I'm in severe debt.

There's nothing I can write on this website or say on television that comes close to the info you can get from a good debt counsellor.   By that I mean one who is free, and working for a non-profit agency so their only interest is helping you sort out your finances.

So my answer is quite simply to make an appointment with Citizens Advice, National Debtline or the Consumer Credit Counselling service, or Christians against poverty (who also do actual counselling as well as debt counselling, so it's good if you've emotional stress too).

Yet  this is only for people in severe debt – which I'd define as someone who either can't meet their minimum repayments and/or has non-mortgage debts of more than a year's after tax salary.  

If you have serious debts but are not in crisis there are many other steps you can take – the most important ones being cutting your interest costs and focusing on repaying the most expensive debts first, which will enable you to continue to function within the mainstream financial system.

What solutions do debt crisis management agencies offer?

Non-profit debt counselling agencies  offer one-to-one sessions to help give you financial help, and you don't need to pay them.

They're non-judgemental, they won't tell you off – they're there to help.  The only problem is they are enormously oversubscribed so it may take a little while to get an appointment. But their websites are useful starting points.

They can use the following solutions, in order of the severity of the problem (least first):

· Debt Management Plans.   This is the most common.  They negotiate with creditors on your behalf so you just make one monthly payment – and there is no threat to your assets.  Though you must repay in full and may still be charged interest.

· Administration Orders.  If you have a few non-mortgage debts.  It stops creditors enforcing the debts without court permission – yet this will have a large impact on your credit rating.  Again debts usually need repaying in full.

· Debt Relief Order.   For non-mortgage debts of under £15,000 if you've less than £50 a month left after all essentials and few assets – puts a break on debts being called in, your credit rating is likely to be impacted for up to six years – and your name goes on the insolvency register.

· IVA (Individual voluntary arrangement).  Effectively a cut down form of bankruptcy – can see some of the debts written off with you making just a single monthly payment.  Yet you can pay upfront and it's not guaranteed to work – and there's a chance you can lose some of the equity in your home.

· Bankruptcy.  Quite simply it means you usually lose your assets (including a home) but you lose the debts too – though you can be required to make payments for up to three years.  Yet for many it's very welcome respite and sees the start of a new chapter in the life – it's far from something to take lightly.   By doing this you are effectively stepping outside financial norms for six years.

What help is there available for people with mortgage arrears?  

There are three types of state support available for anyone struggling to meet their mortgage repayments.

The following are the details  for schemes in England and Wales, but similar exist in Scotland too.

· Support for mortgage interest. For those on a variety of benefits, the Government will make the interest payments on the first £200,000 of your outstanding mortgage for the time you can't afford them. Currently this interest is paid at 6.08% which, as it is much higher than most people's mortgage rates, means it may cover some capital too.

· Homeowner mortgage support scheme.  If you're not on benefits, but have a major change in income, your mortgage lender will defer payments for up to two years, thus giving a payment holiday. But it's important to remember that interest will still accrue – more than likely to a hefty sum in this time – so this is an emergency stop gap measure to get you back on your feet.

· The mortgage rescue scheme. This is where the local council may buy/loan some of your home from you and then allow you to stay living in it. It's aimed at families with an annual income under £60,000 and have priority needs (this means someone who's pregnant, elderly, disabled or with young children) and in danger of losing the property.