Debt consolidation options for paying off your debts

Debt consolidation options for paying off your debts

If you owe a company or people money that you may have borrowed to fund business or education or even for personal reasons and you find it hard to pay back, you can make arrangements to pay your debts. Your options depend on the amount of money and assets you have.

Paying off your debts

You can pay your debts in instalments by setting up:

  • a Debt Consolidation which is a form of debt refinancing that entails taking out one loan to pay off many others. Debt consolidation is a sensible solution for consumers overwhelmed by credit card debt. It can be done with or without a loan. Consolidation cuts costs by lowering the interest rate on debts and reducing monthly payments. It rolls all your debts together, so you don’t have to juggle multiple payments.
  • Debt Management Plan which is an agreement with your creditors managed by a financial company
  • an Administration Order when you’ve had a county court judgment (CCJ) or a High Court judgment (HCJ) against you for debts under a certain amount
  • an Individual Voluntary Arrangement which is managed by an insolvency practitioner

You can also get temporary protection from your creditors through the ‘Breathing Space’ scheme, while still making repayments. You’ll need to apply through a debt advisor.

Where you can get help

Speak to a debt adviser to get help choosing the best way to deal with your debt.

If you cannot pay off your debt

You can apply for a Debt Relief Order or Bankruptcy Order if you cannot pay your debts because you do not have enough money or assets you can sell. Your application will be looked at by someone who works for the Insolvency Service called an ‘adjudicator’. They’ll decide if you should be made bankrupt. Note that the proces to be made bankrupt will also cost you money.

What happens when you go bankrupt

If the adjudicator makes you bankrupt:

  • you’ll receive a copy of the bankruptcy order and may be interviewed about your situation
  • your assets can be used to pay your debts
  • you’ll have to follow the bankruptcy restrictionsThis means you cannot:
    • borrow more than £500 without telling the lender you’re bankrupt
    • act as a director of a company without the court’s permission
    • create, manage or promote a company without the court’s permission
    • manage a business with a different name without telling people you do business with that you’re bankrupt
    • work as an insolvency practitioner (an authorised debt specialist)

Restrictions last until your bankruptcy ends. This will happen sooner if you cancel your bankruptcy.

  • your name and details will be published in the Individual Insolvency Register.

Debt consolidation requirements

Any form of consolidation requires you to make monthly payments, which means that you have a steady source of income.

If you are looking at a debt consolidation loan, the second requirement is that you be creditworthy. Lenders regard your credit score as the most obvious sign of your creditworthiness. If your score is within or above the required score, you’re definitely good to go. If it’s a little lower, you probably qualify, but may pay a higher interest rate. It’s possible you qualify with a score below the requirement, but the result is a bad credit consolidation loan, with an interest rate so high that this is not a good option.

If you are considering debt consolidation

Take the time to run a little self-assessment to see if you are a good candidate for the debt consolidation. Add up your various forms of unsecured debt and the interest rates being charged for each one. Debt consolidation works when it reduces the interest rate and lowers the monthly payment to an affordable rate. Next, look at your monthly budget and spending on necessities like food, housing, utilities and transportation. After paying those bills, is there money left that can be used to pay off credit cards? Your monthly consolidation payment must fit your budget.

When is debt consolidation a good option?

There are several markers that tell you when debt consolidation is a good option. Those include:

  • When the interest rate on your debt falls, preferably to 8% or less
  • When the monthly payment is an affordable part of your household budget
  • When those payments actually reduce the balance owed each month, rather than just meeting the minimum amount required

If you want to be responsible with your money and you want to step away from credit card dependence, you need a plan. Debt consolidation is a plan.

It simplifies bill paying. One affordable payment, once a month, to one source. If you do that, your balance drops and, given time, your credit score rises. Eventually, you can breathe again financially.