If you find yourself in extensive debt of £25K or more and unable to repay your creditors this is never a good situation as having to deal with creditors can be stressful.
With borrowing of this size, you may, however, find yourself excluded from options that are designed for smaller debts such as a Debt Relief Order (DRO). Did you know that there are other debt solutions available if you are £25 000 in debt?
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Why Is It Hard to Manage 25K in Debt?
If you have managed to get into 25K of debt, particularly unsecured borrowing, the size of the minimum monthly repayments across the various creditors may be significant. The rate of interest may also be high meaning that minimum payments are not reducing your outstanding borrowing. In-fact your total debt is continuing to increase in size.
25000 in debt on credit cards
Consider that a personal loan or a student loan is typically at a rate below 10%. In comparison, credit cards have APRs that are usually higher than 20%. If all your outstanding debts are on credit cards, it can be tough to manage a large debt. Very little principal is paid every month compared to a lower rate unsecured loan.
How An IVA Could Radically Reduce Your Debts
What Should I do If I Have Unmanageable Debt?
If you find yourself 25K in debt, it is vital to seek debt advice. You can use a debt service such as the National Debt Helpline, Citizens Advice, or the services of a Debt Management Company.
A debt adviser can help you in the following ways:
- Provide sound advice on better ways to manage your money
- Suggest methods of dealing with your debts which you may not have thought about
- Deal with you in a way that is not judgemental ensuring you do not feel bad about your situation
- Ensure that everything you talk about is treated in confidence
Is There a Strategy to Use If I Am 25,000 in Debt?
If you owe money, the debt avalanche method can be an effective way to reduce your debts before you consider moving forward with a debt management solution to repay your creditors.
The avalanche method is a debt elimination strategy which is also known as debt stacking. It works by paying off your outstanding creditors from the highest interest rate to the lowest interest rate, and it works through the following steps:
- 1Firstly, make the minimum payment on all your outstanding balances.
- 2Try and put additional money towards the balance that has the highest rate of interest attached.
- 3When you have paid off the outstanding balance with the highest rate of interest, pay off the balance with the next highest rate and so on.
Each time you pay off a balance in full, you will be able to free up additional money each month to go towards the next debt, enabling you to get out of debt faster.
The snowball method is another strategy that can be employed to pay off your debts faster. Using the debt snowball strategy, you will work to pay off the smallest outstanding balance working up to finally paying off the largest account balance.
The Snowball also has three steps:
- 1Work to make the minimum payment across all your outstanding balances.
- 2Work to put as much surplus money towards paying off the creditor with the smallest balance.
- 3When you have paid off the smallest outstanding balance, move towards the second-smallest debt, working your way until the final and largest debt is fully paid off.
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How Can I Pay Off 25K in Debt – Solutions
A Look at IVAs
Suppose your outstanding finances cannot be repaid by smart money management advocated by debt advisers using techniques like the Snowball or Avalanche method. In that case, a debt solution plan may be your only option to satisfy your creditors and provide financial peace of mind.
An Individual Voluntary Arrangement (IVA) is a debt management option that can provide a solution if you are more than £25,000 in debt.
What is an IVA?
An IVA is an arrangement where 75% of your creditors agree to a proposal put forward by an Insolvency Practitioner (IP). The proposal includes a Statement of Affairs which outlines your assets, income, and personal finances. The proposal consists of how much the IP proposes that you pay as a percentage of the total outstanding borrowing.
Often Creditors will accept as little as 25% of the outstanding debt. Once a proposal is agreed, the IP will set up and administer the plan.
An IVA sets out over five years; the debtor commits to making a monthly payment into the IVA, which is then distributed to the creditors by the IP. The IVA is a formal arrangement and agreed in a court of law. It means that creditors can no longer take further action against you once an IVA is in place, nor can they add on additional fees or charges. For the debtor, not adhering to the terms of the IVA and maintaining monthly payments can have serious consequences. It can also include the Insolvency Practitioner recommending a non-paying debtor is put into bankruptcy.
The advantages of an IVA
Affordable debt repayments:
It is in no-one’s interest for an IVA to fail. An Insolvency Practitioner will ensure that any proposal put forward makes monthly payments affordable with enough margin for the debtor to live from day to day.
An end to stressful calls:
As soon as you enter an IVA, creditors are no longer able to contact you directly about your debts. The Insolvency Practitioner, as the administrator of the plan, will field all calls and deal with the paperwork related to your debts.
Protect your job
If you have entered an IVA, it does not restrict the type of job you can do. If you are in public sector employment or the finance industry, entering into a different kind of financial arrangement such as bankruptcy can result in you being unable to do your job or apply for employment in these sectors.
The disadvantages of an IVA
As an IVA is a legally binding agreement, your financial status is subject to an annual review for the five-year duration of the plan. If an IVA review shows that you have the means to pay more into your IVA, you are obliged to do so.
Exclusion of some debts
Not all debts can be included as part of an IVA. Secured debt that has an asset attached to it, such as a car loan or a mortgage excludes from an IVA.
Bank account restrictions
When a debtor enters an IVA, bank account restrictions are in place. Under the arrangement, the debtor can only maintain a basic bank account with no credit card, cheque book or overdraft facility.
Other Debt solutions if you are £25K in Debt
An IVA is a robust solution to help become debt free, but it is not the only option available if you are £25K in debt. We have compiled a list of three other options available to you with both the pros and cons; including bankruptcy which many consider an action of the last resort.
Debt Management Plans (DMP)
A debt management plan designs to assist with managing debts allowing you to pay them back at a more affordable level by reducing the monthly payments.
A debt management provider will look at your financial circumstances and work out a budget that meets your household requirements. If you move forward with a DMP, the debt management company will charge a fee to set up the DMP and often demand an ongoing monthly fee as part of your payment.
The advantages of a DMP
- You only need to pay what you can afford to creditors once your provider has put together a monthly household budget.
- Your provider will review your DMP regularly to ensure you are always paying what you can afford.
- You only make one monthly payment into the DMP, and the provider will make payments to your creditors.
The disadvantages of a DMP
- Unlike an IVA, your creditors can still add charges and interest to your debts.
- Your creditors can still contact you, unlike an IVA where an Insolvency Practitioner handles all correspondence.
- Creditors can even take further action against you including County Court Judgements.
Debt Consolidation Loans (DCL)
A consolidation loan works to bring together lots of different outstanding balances and merge them as a single loan and lower your monthly payments. It involves taking out new credit which is the DCL to pay off your existing loans. Most people take out a DCL to reduce their monthly payment, the interest rate on their loans and reduce the companies they owe money to become debt free.
There are two types of DCL, secured and unsecured. Secured is where the amount borrowed is secured against an asset like a house. Unsecured is when any borrowing does not secure against an asset.
The advantages of a DCL
- With a DCL you can end up paying less interest than you were previously paying with the total amount payable being less.
- You only owe money to a single lender.
- Your monthly payments will be lower.
The disadvantages of a DCL
- Debt consolidation does involve fees and costs which may make a difficult situation worse.
- It may take longer to pay off as the DCL end date may be longer than your existing loans.
- It may cost you more money to pay off in the long run.
If you have borrowing that is out of control, one of the ways of resolving your situation if you cannot pay your debts back is to apply for bankruptcy. If you do not want to submit an application for bankruptcy yourself, a creditor may apply to a court to bankrupt you even if you do not want to.
Bankruptcy can have severe consequences, and it may not be the best option for you, with other types of solutions like an IVA serving your situation better.
The advantages of Bankruptcy
- You can keep a reasonable portion of your income to live on.
- You no longer need to speak to your creditors which takes away the pressure of ongoing contact.
- Following a bankruptcy order, creditors need to stop most other types of court action.
The disadvantages of Bankruptcy
- It will become challenging taking out any credit while you are bankrupt, and your credit score is affected for six years following a bankruptcy order.
- If you have been made bankrupt, it may stop you doing certain types of job, for example working in the public sector.
- If you are made bankrupt, your name will appear publicly.
25k In Debt Summary
If you are £25,000 in debt from overspending a gambling addiction or any other reason it can be daunting knowing how to resolve your finances that have spiralled out of control and with angry creditors on the phone and at your door, it can also be stressful.
Getting debt advice straight away is vital. A debt management company can provide advice and provide strategies to improve your money management. Alternatively, they can set up a debt management solution if you see this as the route that you want to pursue. An IVA can be an effective solution allowing you to put a line under your debts and work monthly towards a goal of paying off your creditors.
Be proactive and try to resolve your issues today.
Frequently Asked Questions
Is it true that after six years, your credit score is clear?
Most adverse issues tend to fall off your credit report automatically after six years from the date of your first missed payment. A credit report is a document that itemises your loan and credit accounts and payment history with banks and other finance companies. The actual borrowing does not get erased after six years if it is still outstanding. Creditors can still claim against you, but for your credit rating, six years is a significant milestone.
How much is too much debt?
A commonly banded figure of a debt to income ratio of below 43% is considered the maximum amount of borrowing you should take on. It has been statistically shown that those with a high level of debts as a percentage of their income have trouble making the monthly payments to service that debt.
Is paying off all your debts a smart idea?
It is not essential to pay off all your debts as it is good for your credit rating to be shown to be making regular payments on time over a long period, proving that you are a reliable debtor. However, debts that attract the highest interest, such as credit cards should be paid down as quickly as possible.
Do you think it is good to get a personal loan to pay off your credit card balances?
If you have large credit card debts at high levels of interest, a personal loan, which may be a DCL can be a useful instrument to lower the annual interest rates on your debts. By paying a lower interest rate will allow more principal to be paid down each month, reduce the total borrowing cost and get you out of debt faster.