Formal Solutions

Also known as Statutory Solutions, these use Government Legislation to reach a legally binding agreement with creditors.

While the terms of the agreement are kept, you will be legally protected from collection activity or legal action. Often a portion of the debt is written off.

Not Available in Scotland which has similar but separate insolvency legislation to the rest of the UK.

Informal Solutions

Informal Solutions are just that, informal not legally binding agreements between you and your creditors. They offer a more flexible solution but don’t provide guarantees nor protection from legal action.

Informal solutions you will usually require you to repay the full amount, although some creditors may agree to stop charging any further interest and charges.

Refinancing Solutions

Only open to those able to re-arrange their credit facilities to free up more money to pay towards their unsecured debts. Generally, you’d need a good credit record and some equity to do this.

Considerations when deciding your options

  • Are all my debts legally written off upon the completion of the solution?
  • Is it binding on all my creditors? In other words, does it protect me from further recovery action or extra charges (or both) during the procedure?
  • How long will it last?
  • Will it affect my employment?
  • Will it affect my credit rating?
  • Will my home be at risk?
  • Are fees taken from the money I pay to creditors or must I pay these separately ?
  • How stable are my financial circumstances to maintain payments until the completion of the solution.

Whatever option you choose, the following applies:

Unsecured debts only

None of the options affect the rights of secured creditors, for example a bank or building society that has a mortgage or legal charge over your home. They continue to have the right to take possession of your home if you don’t keep up payments. Having a charge on your home means that if you don’t repay the debt, the creditor has a claim on the proceeds if the property is sold.

Your credit rating

Formal solutions affect your credit rating and show up on your credit record. It is advisable to obtain a copy of your credit record before making your final decision to see how you may be affected.

Many considering a debt solution find that their credit rating has already been damaged by missed payments, arrears, accounts in default, or court judgments.

Where entering into an informal solution such as debt management; you are making reduced payments to creditors and in doing so breaking the term of credit agreements. This can result in defaults being recorded on your credit report

Shortfall on repossessed items

If your home has been repossessed, or you want to voluntarily surrender your home, then any mortgage or secured loan shortfall becomes an unsecured debt, and so can be included in these solutions.

Creditors can make unsecured debt secured

Most debts involving credit and loans are unsecured such as credit cards and bank overdrafts. This means that if you don’t pay the debt, the creditor is not automatically entitled to take something of yours, such as your home. However, in some circumstances they may go to court if you fall behind with your payments. If they then get a court judgment, they may be able to get the court to secure the debt on your home.

Employment implications

Using any of the formal options to help with your debt may occasionally affect your employment. Under the terms of your employment, you may have to inform your employer about it. You should seek advice from your employer or a Trade Union to see if your employment may be affected.

What’s My Best Option?

This depends on your circumstances; stability of financial situation; and your own preferences. Your decision will also depend on how much you owe and how much you can repay from your income and/or assets.

Be prepared to give all the details of your debts and your finances to whoever you seek advice from, and to your creditors. It is essential you give everyone the complete picture.

Be accurate about your income and spending and realistic about your ability to make payments into a solution.

Get Trusted Support

Always check you are dealing with a licensed Insolvency Practitioner, Solicitor, company regulated by the Financial Conduct Authority, or other reputable organisation.

See Money Helper, which is an impartial service set up by the Government to provide free debt counselling, debt adjustment and credit information services.

National Debtline, national charity for people with debt problems publish a useful guide in PDF format called How to deal with debt.

This guide is for resident’s of England and Wales. Options differ slightly in Scotland. The Scottish Government publishes a website to help explain options available in Scotland.