‘Get Out Of Debt Free’ loophole closed. What now for people with problem debts?

A High Court judge has ruled that people with credit card debts will still have to pay up even if their creditors can’t find the original agreement. It’s a blow to those who were hoping that this ‘get out of debt free’ card would see them off the hook. But there are still powerful remedies available to get debt under control and put creditors back in their box. Here are our top tips.

Talk To Your Creditors

The money you owe will not go away. You need to take responsibility, and sort it out before it is too late. Often talking to your creditors before they start contacting you can help. By getting in touch with them, they become aware that you are fulfilling your responsibilities to let them know about a change in your circumstances.

Banks wrote off £1.6 billion of debt on credit cards in Q3 2009, more than double the figure for the previous quarter. They will be more sympathetic to debtors who ask them for help than those who bury their heads in the sand, so get on the phone. If you need some help with this, then speak to debt counsellors who can perhaps do the negotiations for you, before things get more formal, with IVAs and bankruptcy.

Debt Management Plans

If you owe less than £15,000 and need help dealing with your debts, you should speak to someone about a debt management plan.

This is an informal agreement between you and your creditors which helps you to pay your debts off more easily. The interest on your loans is frozen, and you will not be charged late payment penalties. If you use a debt management company you will make a single payment to it each month, and it will distribute that payment to your creditors.

Lenders are keen to take on this informal agreement with you so they actually get some of their money back. If they can get even half the money you owe them, that is better than nothing at all which could be the case if you go bankrupt.

Debt management companies can make the negotiations less daunting – they take them on for you. They do this day in, day out, and the specialist nature of their work means they are likely to be in the best position to help. Your interest should be frozen so you are not having your debt increase while you are trying to reduce it.

You can revert back to a normal repayment plan if your position improves. On the downside, your creditors can change their terms at any time too. So they can unfreeze your interest, impose penalties, and you would not be protected from legal action, such as bankruptcy.

If you don’t want to deal with your creditors directly, then using a debt management company means they will have those conversations for you.

Individual Voluntary Arrangements (IVAs)

An IVA is a five-year agreement you make with your creditors to reduce your debts. You will agree a settlement sum with the people you owe, which is usually lower than the amount that you actually owe – it tends to be around 25 per cent of your overall debt that is eventually repaid.

You need to owe more than £15,000 to qualify for an IVA, and it can take up to two months to set up. You must be able to pay at least £200 a month to your creditors under the agreement, and have at least three institutions you owe money to.

As long as 75 per cent of the companies you owe money to agree to the IVA, then the remainder have no choice but to agree. It is a legal contract, formalised through the County Court, and must be adhered to.

You pay what you can afford, and one payment is made to cover all of your debts each month. This makes it easier to keep track of.

Honesty about your financial position is essential, and you are asked to sign your IVA proposal to confirm that it is a true statement of your financial position. Any dishonesty at this stage could make it null and void.

An IVA is not made public, so no-one need know that you are signed up to one to pay off your creditors.

Bankruptcy

If you cannot afford your debts and do not qualify for an IVA, or your debtors refuse to agree to one, then bankruptcy is the only option for you.

You may not always be able to decide. If you owe money, then the institution or individual you owe it to can petition to make you bankrupt for as little as £750. HM Revenue & Customs makes more people bankrupt each year than any other organisation.

Bankruptcy is serious. You would usually be forced to sell assets to pay your creditors. Your house would not necessarily be safe, and you would be disqualified from being a business director.

You also have no control over your assets. You cannot get more than £250 of credit without specific permission, and your credit would be affected for a long time after your bankruptcy had been cleared.

Bankruptcy can be cleared in as little as 12 months, but will not take more than three years in total before you are debt free. This means you often pay less than you would with an IVA.

But do not try to do this on your own. You should get some advice on your options before making any decisions.