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January debt: What should I pay first and what can I do? How can I pay off my debts and what help is available?
(2 months later)
In January many people can find themselves with debts to clear after overspending at Christmas. Two years of rising prices have left many people struggling to pay their bills and in debt.
Trying to pay off credit cards and overdrafts is a juggling act for many already struggling with the cost of living. If you are in that position one option is to seek a debt relief order (DRO). From 6 April in England and Wales there will no longer be a £90 fee for applying for one.
The Financial Conduct Authority, which regulates financial services, says that 11 million adults in the UK struggle to pay their bills - a rise of 3.1 million compared with 2022. A DRO lets people who have got into severe difficulties start afresh.
So what can you do if you find yourself in difficulty? But there are other ways to tackle your debt. So what can you do if you find yourself in difficulty?
What steps should I take first? What should I do if I'm struggling with debt?
Consumer advice charity Citizens Advice says that you should work out how much you owe, who to, and how much you need to pay each month. First, work out how much you owe, who to, and how much you need to pay each month, says the charity Citizens Advice.
Identify your most urgent financial demands. There are what are known as priority debts and bills because there can be serious consequences if you do not pay them, such as losing your home or facing court proceedings. They should be paid first. Next, create a budget by adding up your income, such as your wage and any benefits you receive, then taking away the amount you need for essential living costs like food and housing. The amount left is what you have available to pay your debts.
They include rent, mortgage repayments, and loans secured on the home, gas and electricity bills, child support and maintenance payments, council tax, income tax, VAT and other taxes, TV licence payments, court fines and payments. Once you have taken stock of your situation, see whether you can reduce your outgoings: you may be eligible for a reduction in your council tax or a lower tariff on your broadband or TV package for example.
Calculate how much you can cover in debt repayments. Create a budget by adding up your essential living costs like food and housing, and take these away from any income such as your wage or benefits you receive. You may also be able to boost your income. Check which benefits you are entitled to on the independent MoneyHelper website, backed by the government, or using benefits calculators run by Policy in Practice and charities Entitledto and Turn2us.
After than move on to looking at other debts, although failure to pay could still lead to the arrival of bailiffs. These are credit cards, store cards, buy-now-pay-later payments, overdrafts, unsecured loans and water bills. Ignoring them would still see the cost of those debts spiral. Where can I get free debt advice?
Always see how you could boost your income, primarily by checking what benefits you are entitled to, and whether you are eligible for a council tax reduction or a lower tariff on your broadband or TV package. It is important to talk about your financial difficulties - the earlier, the better - or you may find yourself in a spiral of debt.
How to check if you can claim a benefit If you think you cannot pay your debts or are feeling overwhelmed, seek support. Help is available. A trained debt adviser can talk you through the options available.
Guide to benefits. when you qualify and what to do if something goes wrong, from the independent MoneyHelper website, backed by government Information and support is free of charge - here are some organisations who may be able to help.
Check benefits calculators run by Policy in Practice and charities Entitledto and Turn2us How do I start paying off my debt?
Who can I talk to? Identify which bills and debts are most urgent and pay them first, says debt advice charity StepChange.
It is important that you do talk about financial difficulties before finding yourself in a spiral of debt. The earlier, the better. That will include your rent or mortgage repayments, and any other loans secured on the home. It also includes gas and electricity bills, child support and maintenance payments, council tax, income tax, VAT and other taxes, TV licence payments, court fines and payments.
If you think you cannot pay your debts or are finding dealing with them overwhelming, seek support straight away. You are not alone and there is help available. A trained debt adviser can talk you through the options available. These are all what are known as priority debts and bills, because there can be serious consequences if you do not pay them, such as losing your home or facing court proceedings.
Information and support is available and free of charge - click here to find out about organisations who may be able to help. You may have additional debts, such as credit card and store card debts, pay-day loans, buy-now-pay-later payments, overdrafts, unsecured loans and water bills. If you do not pay these off, their cost can spiral and could lead to legal action or bailiffs seizing your property.
My energy bills are the biggest problem. Will my supplier help? StepChange advises trying to make the minimum payments on every debt to avoid default charges, which can affect your credit rating. After that pay most towards whichever debt has the highest borrowing cost or interest rate.
Your supplier must give you a chance to clear your debt through a payment plan first. What can I do about energy bill debt?
If you don't agree a plan with your supplier, it has been the case that they might try to force you to have a prepayment meter installed, or they may switch your existing smart meter to prepayment mode. Your energy supplier must give you a chance to clear your debt through a payment plan - that means you agree to pay off the outstanding amount you owe, but spread out in smaller amounts over a longer period.
But since it emerged that meters were being forcibly fitted into the homes of vulnerable people, companies are now required to pass certain tests before they can switch customers. If you don't agree a plan they can switch you onto a pre-payment mode to make sure you do not fall further into arrears.
I need some time to get myself sorted. What do I do? Energy bills- What can I do if I can't afford to pay- - BBC News
A "breathing space" scheme in England and Wales shields people in problem debt from further interest and charges. What is a breathing space?
People receiving debt advice can apply for the break, which lasts for up to 60 days, to prevent them falling into a spiral of debt. People in England and Wales who are getting debt advice can apply for a break, lasting up to 60 days, as part of the "breathing space" scheme. It shields them from further interest and charges to prevent them falling into a spiral of debt.
People receiving mental health crisis treatment can apply for a scheme which lasts for the length of that treatment, plus another 30 days. If you are receiving mental health crisis treatment you can also apply for a breathing space scheme which lasts for the length of your treatment, plus another 30 days.
Consultation is under way for a similar scheme in Northern Ireland. In Scotland, an alternative short-term debt relief system is known as a Statutory Moratorium. Consultation is under way for a similar scheme in Northern Ireland. In Scotland, an alternative short-term debt relief system is known as a Statutory Moratorium and lasts for six months.
What happens if there is no prospect of paying off debts? What if I can't afford to pay off my debts at all?
For some people, there is little or no chance of paying off debts, and so they may have to consider some form of personal insolvency. If you think there is no way to pay off your outstanding debts, you may have to consider some form of personal insolvency.
This should only be done after seeking advice. There are different forms of insolvency which may be considered depending on your circumstances and where you live. This should only be done after seeking advice.
Bankruptcy: This is the most serious option, which involves an official receiver being appointed to sell off your assets to pay your debts. If you own a house or a car you may lose them. Going through an insolvency process can have an impact on your personal and professional life, debt charities warn, and will affect your credit rating for up to six years.
The bankruptcy will affect your credit record for at least six years. But after one year all your debts will be written off. The procedure currently costs £680, but you can pay in instalments. Should I apply for a debt relief order?
Individual Voluntary Arrangement: Under an IVA, an insolvency practitioner will help you strike a deal with your creditors, which allows you to pay off your debts over a fixed period - say five years. Once approved, all interest on unsecured debt is frozen. A debt relief order (DRO) is the easiest form of insolvency and is designed for people with few assets on low incomes. Your debts must not exceed £30,000 (rising to £50,000 at the end of June).
There is less stigma with an IVA, and a greater chance of you keeping your home if you own one. If your application is accepted, some of your debts will be frozen for one year, then written off. It previously cost £90 to apply for a DRO but from 6 April it will be free if you live in England, Wales and Northern Ireland.
Debt Relief Order: This form of insolvency, introduced in 2009, is the easiest of all. Your debts must not exceed £30,000. If your application is accepted, some debts will be frozen for one year, then written off. A DRO costs £90. Another option is an Individual Voluntary Arrangement (IVA). Under an IVA you make smaller payments over several years and then the rest of the debt is written off.
Insolvency in Scotland: If you live in Scotland, bankruptcy is known legally as sequestration. However there are three alternatives: a Debt Arrangement Scheme, a Debt Management Plan, or a Trust Deed. Full bankruptcy, which is also usually completed within a year, can result in you having to sell assets such as a house or car to pay your debts.
If you live in Scotland, bankruptcy is known legally as sequestration. There are three alternatives: a Debt Arrangement Scheme, a Debt Management Plan, or a Trust Deed.
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