Too much retail therapy is a common reason for not being able to pay your credit card off each month. But it only takes a sudden change in circumstance - such as divorce, redundancy or illness – to turn a mild case of overspending into a serious debt. Whether it's a £1,000 student loan, £7,500 finance on a car or £50,000-100,000 on credit cards; debt's a monster if, after basic living expenses, your income doesn't leave you enough to pay it off. Better you tame it before someone else decides your fate.
There's a lot of help out there – some good, some bad – so it's as well to be armed with the right info before you seek advice. Remember, you've lost control of your finances, not your marbles. There are four options: bankruptcy, IVA, debt consolidation or debt management. They're all worth considering but your circumstances will dictate which is best for you.
Bankruptcy
This option means virtually all your assets are sold and the money is used to pay your creditors as much as possible. It's only for the truly insolvent who don't have any other way at all to pay off their debts.
In its favour:
It gets rid of virtually all your debt in a relatively short space of time - about a year. Maybe a good option if you're young, on a low income or have neither assets nor financial responsibilities.
But:
1. You lose all your assets. There are exceptions - you can keep certain household things such as pots and pans, and any 'tools' you need for your job - but this will include your home if you own one.
2. You get six years of bad credit rating. And then you start from scratch - so borrowing money is difficult because you've got the credit history of an 18 year old. And even if someone doesn't twig that you're a discharged bankrupt you're unlikely to get very much credit.
3. There's still a huge amount of stigma attached to bankruptcy. For example, you may find it is a disciplinary offence and written into your contract of employment – this is often the case in the financial services industry. In other professions, like the army and the police force, you could be dismissed. Professionals, such as chartered accountants, will lose membership of their professional body and you will not be able to be a company director, a JP or a school governor.
4. Some creditors can make further claims on you (eg the government for student loans and the court for unpaid fines).
5. Bankruptcy removes debt swiftly but the after-effects (both practical and psychological) can linger for a very long time. This is the 'nuclear' option so don't let anyone tell you it's an easy one.
Individual Voluntary Arrangement (IVA)
So called because you enter freely into a legally binding arrangement with your creditors to pay them as much as you can afford over a given period of time. You do not have to sell any of your assets (though getting rid of any luxurious purchases will help your case!) but you do have to prove insolvency.
