Where to start?

Sunday 16th November, 2008 - £7,408.16 in debt…

Just over six months ago, I chose to work myself into an early grave and pay off my debts once and for all. But I do realise that I’m in a very fortunate position, and not everyone who’s got themselves into a similar mess can just work harder and find a solution. So, what could I have done instead?

There are a few tried and tested methods of debt repayment, or writing off debts, so I thought I’d explain them here for those with a similar debt problem and no easy way out.

Bankruptcy

You can be made voluntarily or involuntarily bankrupt if you can’t pay your debts. There’s a good guide to bankruptcy here, but essentially it means that your debts are written off but you lose control of your assets (house, car etc), which will be shared out among your creditors to pay off what you owe. If you’re declared bankrupt, you’ll be unable to obtain credit for more than £250 without special permission, and your credit rating will be negatively affected for years. A first bankruptcy order normally lasts one year.

IVA

This is an Individual Voluntary Arrangement, and it’s seen as a step below bankruptcy. If you can afford to pay off any of your debt, it’s certainly a better option: it allows you to haggle with your lenders until you can come to an agreement over what you can afford to pay and what the lender can afford to write off. The Citizens’ Advice Bureau will offer impartial advice on how to contact your lenders and what to say to get the best results, and there’s an article that explains the whole process here.

Consolidation

Yes, why not consolidate your debts into one easy monthly payment? Along with ‘Bang! And the dirt is gone!’, those must be the most grating words in advertising. But would it be worth the hassle? Well, it’s just a matter of comparing the loans around and reducing your monthly payment - not just consolidating it. If you can find a loan that saves you some money in interest, go for it. If not, is it really that difficult to set up four standing orders instead of one? Use a good loans comparison service to find out whether you could save money this way.

I referred to my own two-year battle (which continues to be hard work) as the easy way out because it is. Even if you think that destroying your credit rating with a bankruptcy or IVA won’t be a problem, there’s no telling what the next few years will bring and what you’ll need good credit for. And a consolidation loan from an unscrupulous or expensive lender could be more trouble than it’s worth, so these methods should never be looked upon as a quick fix: just a last resort.