Problem debt is on the rise.
According to new data, the number of people in the UK with problem debt has doubled since 2018, to nearly 6% of the population. This is a concerning statistic that has been made worse by the Coronavirus Pandemic.
If you’re in problem debt, you face a challenging and stressful experience. But is there anything you can do to improve your lifestyle and work to be free of such debilitating debt?
What is Problem Debt?
Problem debt is not like normal debt.
Normal debt is an inconvenience to live with but is manageable. Normal debt is having a credit card you need to repay or a loan that eats up a good chunk of your expendable income but the payments aren’t insurmountable.
Problem debt is much more severe. While almost 80% of people are in debt, only 6% are in problem debt. Problem debt is defined as being difficult, if not impossible, to repay. With problem debt, you may struggle to make monthly repayments and by only just meeting the minimum repayments may not even meet interest charges, let alone pay back what you already owe. You may also risk going into further arrears and find that you are constantly “robbing Peter to pay Paul.”
Problem debt is a spiralling, all-consuming beast. It can put a serious drain on a person’s financial, emotional and physical health. Roughly 4 million people are struggling with problem debt, and of those, around 25% of individuals have been diagnosed with depression.
Problem debt can feel like the end of the line — like there is no way out.
But for every problem, there is a solution. You just need to know where to find it.
What Can You Do If You’re in Problem Debt?
Given the severity of problem debt, normal rules often don’t apply.
Typically, simple budgeting advice can go a long way to clearing debt. Cycle to work to save on fuel, stop buying coffees and takeaways and turning off the lights to cut energy expenses are all great tips for people who need to tighten their belts a bit more.
And sometimes, this is enough.
It can take a lot of time, but the key to managing debt is to get on top of repayments, stop them mounting, and slowly pay them off. You can achieve this while in problem debt if your debt is relatively young and not accruing too much interest or you have a strong enough income to support yourself.
The issue with problem debt is that it is often near-impossible to stop the debt volume from increasing as interest goes up and up. The larger the debt becomes, the more interest is heaped on top, and the cycle continues in a way that it just cannot be paid off on the average working wage — let alone those on less or having to keep families going at the same time.
This is where personal debt management techniques stop being effective, and formal debt management solutions will need to come into play.
One such solution is an Individual Voluntary Arrangement (IVA). This is a legally binding agreement between you and your creditors, negotiated on your behalf by an Insolvency Practitioner. This agreement is designed to stop spiralling debts, reduce your monthly payments to a manageable level, and help you regain financial control to turn your life around.
An IVA allows you to make one affordable monthly repayment for a set period, usually five or six years, and at the end — as long as you have made all of your payments in line with your agreed proposal — the rest of your debt will be written off.
Whilst there are clear benefits to someone who finds themself in problem debt, including debt write off, no more creditor action and no more interest and charges being added on top, there are also benefits for your creditors, who will need to agree to your proposal at the outset. They will have assurances that they’ll get some of the money you owe them, instead of a declaration of bankruptcy or simple non-repayment and they’ll save costs as they won’t need to instruct collection agents or bailiffs to collect the money from you — everything is directed through your IVA Supervisor
Of course, as an IVA allows an element of debt write-off, there are some drawbacks as you will be expected to stick to your approved budget. Living with an IVA does mean tightening your belt and making the repayments agreed as part of your financial solution. However, these repayments are specifically designed around your income and means, so while they might be challenging, they are entirely manageable. .
Whilst your credit rating may not be the best if you are in problem debt, the IVA will stay on your credit file for about a year after it’s completed and it will be placed on the Insolvency Register which is a public record.
An IVA is just one of many debt solutions available and may not be the right debt solution for all, but for some it is a life-line allowing them to deal with their problem debt and get back in control of their finances, taking the stress and worry of problem debt away for good.