Debt seems to be an almost inescapable part of modern life. It has become very common to use credit cards, have mortgages, and take out loans to survive during financial hardship. So, what is debt? And what do you need to know about it?
1. What is debt?
Most people know what debt is. It is an amount of money that is owed to another person or company. But what many people don’t know is that there are many different types of debt.
Secured debt: Debt which is connected to one of your assets, such as to your house or your car. Mortgages and car loans are the best example of this, but it is possible to take out loans against other valuables, such as white goods, televisions, or even jewellery.
Unsecured debt: Other debts which are not taken out against your possessions. This may be credit card debts, bank loans, or pay day loans. However, this does not include loans that require a guarantor.
Joint debt: Joint debt is debt which is taken out by two, or more, people. All the people who have taken out these debts are liable for the full amount, and if one person cannot pay, the others must pay the full amount. Credit cards cannot have joint debt as only one person ever legally owns the card, any other people given access to the account are not legally responsible for their debt.
Arrears: Arrears occur when a payment is missed. For example, you could have tax arrears, rent arrears, or utility bill arrears. Tax arrears are one of the worst debts to have because the government is more likely to turn to legal measures to reclaim the debts, such as Bailiffs, and are less likely to be open to negotiation.
Student Debt: Student debt is very different to other kinds of debt, because it operates more like a tax than a debt. A percentage of your income is taken to pay off your debt, and it often happens before it reaches your bank account. However, if you work abroad, or are self-employed, you may have to calculate and pay this debt back yourself.
2. Debt is not scary
As we mentioned earlier, debt has become a very normal part of life, and this is because not all debt is bad debt. Student debt, for example, allows you to have an education, and can be very manageable.
Just because you have some debt, doesn’t mean you are in trouble. Debt is often used as a great tool to build up a great credit score. If you are able to pay off your debts comfortably, then you have nothing to worry about. It is important to remember your ‘priority debts’. These are debts, such as council tax arrears, that can have serious implications if they are not paid. Local councils, for example, could have the amount taken directly from your wages or benefits.
There are a number of signs that you may need serious help. If you are sacrificing food, or other necessities, in order to pay your debts, or you can’t afford to put aside any money at the end of the month, then you should probably look into getting some debt advice.
Remember, if you do need help, you are not alone. In the UK, there are 8 million people who are seriously struggling with their debts.
3. Bankruptcy is not the only solution
Once you have realised that you need help sorting out your debts, it is also important to realise that this does not mean you have to go bankrupt! There are plenty of debt solutions to explore that are great alternatives to bankruptcy.
Debt Management Plans: You can contact your creditors and negotiate with them in order to lower the monthly amounts that you are paying. If you are open and honest with them, they will often agree to do this as they know it is the best chance that they have to get the money owed to them. However, this is not a legal solution, and so there is no guarantee that your creditors will accept, or follow through, with the agreement. For more information on Debt Management Plans, click here.
Debt Consolidation Loans: This is a debt solution which allows you to merge all your debts into one payment, but taking out one big loan to cover all your loans, and then paying that loan off. This can help you manage your debts, but is unlikely to significantly make the amount you pay more manageable, unless you manage to find a loan with a significantly smaller interest rate.
Individual Voluntary Arrangement: An IVA is a legal solution. Affordable monthly payments are calculated based on your actual income and expenditure. You pay these to an Insolvency Practitioner who distributes it among your creditors. As everything is done through an IP, your creditors are no longer able to contact you. Unlike Debt Management Plans, IVAs last for a limited time – 5 or 6 years. After this time, your remaining debt is written off.
Trust Deeds: A Trust Deed is the Scottish Equivalent to an IVA. Like an IVA, affordable monthly payments are distributed amongst your creditors. However, Trust Deeds can last for as little as 4 years.
Bankruptcy: Finally, there is Bankruptcy. In Bankruptcy, an Official Receiver takes control of a person’s finances and assets. This means they can organise payments to creditors out of your wages, and sell your assets, such as your home and your car, to pay off as much of your debt as possible. It can cost £680 to file for bankruptcy. The Scottish equivalent is called sequestration.