How to become debt free even when you have debts

Living with debt is not anyones type of fun. Wrestling with any type of debt caused by loans, credit cards, payday loans or gambling should be taken very seriously.

The process of helping you become debt free can be broken down into four simple stages.

Step 1: Getting all the facts

You’ll be asked to provide information about yourself and about your creditors, what you owe and what may be owed to you, so that the process of helping you become debt free can begin. You’ll also need to obtain an up to date credit reference file to make sure the information held is accurate.

Step 2: Establishing your affordable payment plan

You’ll need to establish an affordable monthly payment plan for you based on your personal budget – this is often a fraction of what you’re probably currently paying to your creditors.

Step 3: Taking action against creditors

You will contact your creditors and start the process of legally challenging any unenforceable agreements. This can be from bad credit lenders, cash advances, credit cards or bank debts.

Step 4: Determining your ‘true enforceable debt level’

How quickly could I resolve my debt difficulties?

The facts of every plan make it unique;

The length of each case depends on:

  • The amount of your presenting debt
  • How much you can afford to pay each month
  • Who your creditors are
  • Your personal commitment to the plan.

Frequently asked questions about debt plans

Can I do this myself?

Simply put, yes. You can take action against your creditors.

When do you pay my creditors?

Whenever a client’s alleged liability has been demonstrated to be compliant (with reference to the Consumer Credit Acts), you should rigorously follow the Financial Conduct Authority guidelines in making payments to creditors. This will happen within five working days of receipt of cleared funds. During the time of waiting for verifying information from your creditors you should be making goodwill token payments on your behalf. This may impact on the amount you owe, your credit rating and result in creditors taking action against you.

Is it morally wrong to challenge credit agreements?

The Consumer Credit Act 1974 was established following a parliamentary enquiry (Cork report). In order to help consumers be treated more fairly by lenders, parliament created a set of rules to govern all consumer lending. The imbalance of power between lenders and consumers was recognised and the act seeks to readdress this. The rules are to make sure that there is openness and honesty in lending.

No matter how you fell into debt, whether it was through the use of payday loans or credit cards, you are protected by this act. Where creditors fail to comply with the act they may be breaking the law and there are serious consequences for such breaches. This can result in courts determining whether an action by a creditor is legally correct, or otherwise.

What if a loan is secured against my home

Providing the loan is regulated under the Consumer Credit Act, you can probably challenge such an agreement.

Please note that by not keeping up contractual payments on a loan made against your home then you can risk loss through repossession.

Will my creditors continue to contact me?

Although you will ask all creditors to desist contacting you directly, it is quite possible that they will continue. They do have a legal right to do so, but only if they are in compliance with debt advice guidance.

However, although with some debt recovery methods they can be intimidating. You should refer all letters, phone calls and court papers to your consolidation company so that they can deal with them for you.

What do I say to creditors when they call me?

If they ask you specific questions, please tell them to put these queries in writing. Then forward any correspondence from them to your caseworker team (in the provided stamped addressed envelopes) and we will deal with it.

Your creditors may seek to persuade you to pay them regardless. We appreciate that such action by creditors can be unnerving for you and we would recommend that you remind your creditors that First Step Finance is now representing you.

What if a creditor refuse to deal with the company I hire?

The FCA’s guidelines state that they have a duty to deal with any agent that you instruct.

If the creditor continues to say that they will not do so, then please ask them to put it in writing, and pass the correspondence to us and we will deal with it.

Can the creditor refuse to refund charges and payment protection insurance (PPI)?

Where a creditor does not co-operate, or refuses to refund unfair or unreasonable administrative charges or PPI premiums, then we would propose referral to our panel of solicitors for consideration of formal litigation.

We have an experienced legal team who assists you with your debts. They fully understand the methods that your creditors and collectors use in their contact with you, and our team will act in your best interests to resolve any issues as easily, and swiftly, as possible.

Consolidating your existing debts into one smaller monthly repayment is a route often suggested by lending companies and adopted by some borrowers. For example if you have multiple loans or payday loans with different companies, bring all these outstanding balances together will lower the interest being levied considerably.

If used properly, restructuring debts this way can help alleviate your debt burden but it may also resolve your debt difficulties in a quicker time period.

By reducing the interest burden of existing loans and bringing repayments within budget generally lengthens the time before you are financially independent.

On the other hand, if there are more serious underlying problems which are not addressed it may grant temporary relief before creditors contact you again.

Pros and cons

This can be an option if you’re paying high interest charges on your existing loans, if you need to reduce the size of your monthly payment or if you need to release additional money to meet unexpected commitments, freeing up extra cash from your home whilst ensuring your monthly repayments don’t increase.

However, lumping all your loans into one may not be the best option if you’ve already consolidated your debts several times in the past.

Secured and unsecured loans

Depending on whether you are a homeowner or tenant, loans come in two forms.

Secured loans are typically secured on your property as a second charge. Because of the greater security for the lender with this type of loan, larger sums can be borrowed, often over a longer period.

An unsecured (or personal) loan is the alternative. The majority of these types of loans for bad credit are available but interest rates are likely to be higher

Bankruptcy is another way of dealing with debts you are unable to pay. The bankruptcy proceeding frees you from your debts so you can make a fresh start (subject to some restrictions). It also makes sure your assets, if any, are shared out fairly among your creditors.

Filing for bankruptcy

When a bankruptcy order has been made, you must comply with the official receiver’s request to provide information about your financial affairs. The receiver is appointed by the court. You may also have to go to the court and explain why you are in debt. If you do not co-operate, there is a possibility you could be arrested.

Bankruptcy costs

In a creditor’s petition, the costs of the bankruptcy proceedings are paid first from the money that is available. The costs include fees that the official receiver, or the insolvency practitioner, charges for administering your case.

The official receiver or trustee will take control of all your non-essential assets on the making of the bankruptcy order. They will dispose of them and use the money to pay the fees, costs and expenses of the bankruptcy and then finally your creditor’s claims.

Individual voluntary agreements

An individual voluntary arrangement (IVA) begins with a formal proposal to your creditors to pay part or all of your debts. You need to apply to the court and you must employ an authorised insolvency practitioner to prepare the arrangement and act on your behalf.

Insolvency practitioners are usually accountants or solicitors and their fees are similar to those charged by members of these professions for other kinds of work. Often start-up fees are payable and can be expensive.

At court

You must then apply to the court for an “interim order”. This prevents your creditors from presenting, or proceeding with, a bankruptcy petition against you while the interim order is in force.

The insolvency practitioner as a Nominee will tell the court the details of your proposal and whether in their opinion a meeting of creditors should be called to consider it.

If a meeting is to be held, the date of the meeting and details of the proposals are sent to your creditors. Only those creditors who have had notice of the meeting are bound by the arrangement, so it is important that you have accurate records of all your creditors’ names and addresses. Otherwise, the arrangement might fail because the practitioner cannot contact all the creditors and, therefore, obligate them to it.

Proposal meeting

At the meeting, the creditors vote on whether to accept your proposals. If enough creditors (over 75% in value of the creditors present in person or by proxy, and voting on the resolution) vote in favour, the proposals are accepted.

The insolvency practitioner supervises the arrangement and pays the loan lenders or credit providers in accordance with the accepted proposal.

Benefits over bankruptcy

An individual voluntary arrangement gives you more say in how your assets are dealt with and how payments are made to creditors than bankruptcy. You may be able to persuade your creditors to allow you to retain certain assets (such as your home). Because you will not have to pay some of the fees and expenses, which are charged in a bankruptcy, the overall costs are likely to be less too.

If you enter a voluntary arrangement but fail to give full details of your assets, loans, debts or fail to do what you have agreed under the arrangement, then the insolvency practitioner, or any lender bound by it, may still petition for your bankruptcy.