How will being in a debt plan affect me and my life?

If you’re wondering about this, don’t worry. You’re not alone. It’s important that you understand the different options available to you and feel comfortable with the one you choose.

We’ve been providing free debt advice and solutions for over 30 years. And we believe that you can – and should – be able to live a happy, worry-free life while tackling your debts.

Our specialist advisors will take the time to review your situation and provide you with the information you need to decide which debt solution is the best one for you.

If you’re concerned about how a debt plan will affect your lifestyle, credit rating, home, or employment, read on to find out more.

Whatever your concerns may be, the most important thing to know is that the biggest risks come from simply doing nothing to tackle your debts. And generally, the longer you leave it, the worse things will get.

By recognising there’s a problem – and taking action – you may be able to significantly reduce any negative impact on your life, both now and in the future.

We’ve put together answers to some of the questions we’re asked frequently with facts and feedback from real people who’ve entered into a plan with us.

• Will my spending be restricted?
• Will my credit rating be affected?
• Will I still get hassle from my creditors?
• Will more interest and charges be added to my debt?
• How long will it take before I am debt-free?
• Will there be any impact on my tenancy?
• Will there be any impact on my home?
• Will it affect my current job?
• Will it affect my future career?

Will my spending be restricted?

Depending on which debt solution you enter, you could be asked to reduce some areas of your spending.

We’ll work with you to create a realistic budget so that you’ve got enough money to run your home, pay for your household costs and keep on top of any essential bills. The leftover amount should be affordable for you to pay into your plan. 

We understand that unexpected things can happen, so we’ll always work with you to make sure that your budget is realistic and affordable. If something happens while you’re in a plan, contact us so we can update your budget.

We’ll review your budget with you every year to make sure that it covers everything, that your payments are affordable, and that you are aware of any other debt solutions that might be suitable for you.

Will my credit rating be affected?

All debt solutions will affect your credit score, but doing nothing will too! It’s important to remember that by taking control of your debts now, you’re building a healthier credit history in the long term.

Your debts may have already impacted your credit score if you’ve made late, reduced or missed payments. Some lenders will apply a default notice to your account, which cancels the original agreement you held with them. Any markers, notes, or notices that lenders apply to accounts will show on credit reports for six years from the date it was issued.

Informal Solutions- Such as Debt Management Plans (DMP).

• Some creditors may add a note to your credit report that you’re in a DMP.
• The payments you’ll make into your DMP are set at an amount you can afford. They’ll be less than the contractual repayment amount you originally agreed with your lenders. They’ll usually note this on your credit report.
• Some lenders might send you a default notice, which will show on your credit report for six years from the date it’s issued.

Insolvency Solutions such as Individual Voluntary Arrangements (IVA), Debt Relief Orders (DRO) or Bankruptcy

• Will be listed on your credit report for six years from the date it’s approved.
• The details of your solution will be listed on the public Insolvency Register from the date of approval for the duration of the plan.

You may find it harder to borrow in future or be offered higher interest rates when applying for credit cards, loans, mortgages or other credit.

Don’t forget that there are ways to improve your credit score without using credit – such as being registered on the electoral register and keeping on top of current mobile phone contracts and utility bills.

Will I still get hassled by my creditors?

We’ll speak to your creditors on your behalf while you’re in a plan. It’s likely that you’ll still receive some automated letters or emails while they update their systems, but this should reduce after a few months.

In a DMP, you might still be contacted by your creditors. In an IVA, Bankruptcy or DRO, your creditors will agree not to contact you or chase you for payments. 

You’ll still receive important information from your creditors, such as annual statements or defaults in all debt solutions.

Please get in touch with us if you’re feeling harassed or pressured by a creditor while in a debt solution so that we can help.

Will more interest and charges be added to my debt?

In an informal debt solution (like a DMP), creditors can add interest and charges to your balance. Over 70% of people in a DMP had their interest and charges frozen in their plan.

In more formal debt solutions (like IVA or Bankruptcy), interest and charges are frozen as soon as the arrangement is approved. 

How long will it take before I am debt-free?

In a DMP, you’ll repay everything you owe over a longer timeframe by making an affordable payment. We’ll split this fairly between your creditors and ask them to freeze your interest and charges to help you finish your plan faster. If they don’t agree to, it could take you a little longer to finish your plan. 

Other solutions, such as an IVA or Bankruptcy, have fixed timeframes. These will be agreed upon at the start of your plan. After this, any outstanding balances will be written off.

Will there be any impact on my tenancy?

It’s unlikely that your plan will affect an existing tenancy agreement. 

If you have current rent arrears, you can protect your tenancy agreement by prioritising a payment to these in your budget. If you choose to include these in your plan, we’d recommend checking your tenancy agreement or with your landlord to see how this could affect you.

If you’re applying for a new tenancy agreement for a privately rented property, we’d recommend checking with a letting agent or landlord to see how this might affect you.

Will there be any impact on my home?

It’s unlikely that a DMP would have any impact on your home. However, it doesn’t offer any formal protection from your creditors.

In an IVA, your home will be protected. You won’t be asked to sell it; you’ll still own it when you complete your IVA. There are many safeguards in place to protect you, your home and your equity.

All IVA companies have to review how much of your home you own – this is called your “equity”. Your equity is worked out by subtracting your mortgage and any other secured lending against your home from the property’s value.

What happens with your equity is based on its value when your IVA starts. We’ll review your situation, affordability and the probability of you being able to remortgage with you so that you know from the beginning of your plan what will happen. There are three ways your equity can be treated in an IVA:

• If you have less than £5,000 equity based on 85% of the property value – you won’t need to do anything.
• If you have more than £5,000 equity based on 85% of the property value and we think it’s unlikely that you’ll be able to remortgage – your IVA will be extended for 12 months. This means your plan will be six years instead of five years.
• If you have more than £5,000 equity based on 85% of the property value and you might be able to remortgage – you’ll need to have your home valued six months before your plan is due to end to see how much equity you have and if you can release it. If you’re able to, you’ll be asked to pay some or all of this into your plan. In our experience, it’s unlikely that you’ll be able to remortgage, and it’s more likely that your IVA will probably be extended for 12 months.

Will it affect my current job or future career?

Most jobs won’t be impacted by a debt solution. However, some roles in financial services or regulated employment sectors could be.

Some debt solutions will be listed on public registers, and your credit report and your tax code may change in other solutions (such as Bankruptcy). Your employer may become aware of your financial situation if they view any of these.

Your employment contract or HR manual should explain if and how any debt solutions could impact your employment.