12 Days of Money-Saving: beating debt

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stressed over debtsDavid Cheskin/PA Wire

At this time of year, most people drift towards the limits of their accounts - or their credit cards. For many it can take us well into the New Year to get back on an even keel. However, for others, this is simply heaping more misery on an already intolerable situation. For them, debts have become an expensive nightmare that is keeping them up at night.

But however bad your debts are, there is a solution. It's just a question of finding the right one for you.



One in five Britons are being forced to borrow money from relatives to help them buy Christmas presents, while almost half (44%) will receive some kind of financial assistance from their families to see them through the holiday period, according to new research from Scottish Widows think tank Centre for the Modern Family.

But while these short-term solutions may help to tide them over, it's vital that we find the right solution for the long term. The right one for you will depend on just how much debt you have, and how much money you can find in order to start repaying it.

Repaying debts

At their most manageable, you may have debts that you can keep on top of it you shift borrowing to a lower interest rate. If, for example, you have a £7,500 debt on a credit card, you could save £3,000 a year by moving it to a personal loan - which is a big step forward in paying it off.

However, it's essential that you don't just build up more problems. If you consolidate your loan you have to draw a line in the sand, commit to paying it off, and not building up a penny more in debt.

If your problems are more serious you can talk to a debt charity, such as Step Change, who can arrange a debt management plan. This is done by talking to all the banks and other businesses you have borrowed from, and arranging for you to pay it off at a rate you can afford over a timescale that you can work to. You will repay all your debts in time, but this will stop impossible interest from building up while you do so, because most lenders will agree to freeze the interest while you repay it.

Insolvency

For some people, however, things have got worse, and they will not be able to repay their debts in full. For them, the answer will be some form of arrangement through an insolvency practitioner.

This could be an Individual Voluntary Arrangement, in which the insolvency company will work out what cash you have, and then will divide it between those you owe money for for a specific period of time - usually five or six years. Over this time you may be able to pay all of your debts, or just part of them, but at the end of the period the rest will be wiped out.

You will, however, pay the price of a severely damaged credit rating, and you will be made to sell any valuable assets - including any car worth more than £5,000 - and you may have to release any equity in your home.

For some a Debt Repayment Order will be the answer. To apply for one you must owe less than £15,000 in unsecured debts, you can't own your own home, you can't have assets of more than £300, and you can't have any more than £50 a month left over after you've paid all of your living costs. If you qualify, your debts are frozen for a year, and if your circumstances haven't changed at the end of the year, you will have the debt cancelled.

Finally, at the most serious end of the spectrum, you may need to go bankrupt. This will apply if your debts outweigh your assets - including your home. The process usually takes a year, you will have to sell anything valuable - usually including any property - although you can keep income you need to live on. In some cases you may also lose your job, as some employers will not employ bankrupts.

To help you decide which approach is best for you, it's well worth talking to a free debt charity, such as Step Change or the Citizen's Advice Bureau, who will be able to go through everything in more detail and tailor their advice to your situation.

None of these solutions are simple, and none are pleasant. However, all of them will eventually offer light at the end of the tunnel, so that one day you can look forward to the New Year as a fresh, debt-free start.

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