Very few people want to experience financial difficulty but it can happen quite easily and quickly, sometimes as a result of matters outwith your control e.g. redundancy, relationship breakdown or overspending at this time of year.  It is not uncommon for someone to use a traditional credit card or online payment facility, and then realise that even the minimum monthly payments are hard to find, with interest making the debt burden even worse.  Howsoever incurred, managing your debt can be stressful, complicated and embarrassing.  The thought of approaching someone to discuss such a personal matter can be quite daunting and this article provides some broad guidelines on options that might be worth considering as we head into 2022 :

1. Debt consolidation : you may be in a position to borrow money from a bank, possibly by securing a loan against heritable property, in order to discharge the liabilities that are causing concern. Of course, failure to meet repayments on a secured loan can put your house or other assets at risk.  This process can be costly in terms of the interest rate that you may have to pay on the top-up loan, but the monthly payments may be less than the amounts charged by your creditors.  Regrettably, many people find that mainstream lenders do not provide loans to settle old debts, which may mean using a more obscure lender who will charge a very high rate of interest.  Alternatively, you may be able to borrow from a friend, colleague or relative.

Borrowing requires to be repaid and thus, all you are doing is replacing one liability with another and hence, you need to be sure that this is a practical option in view of your pattern of expected income and expenditure.

2. Informal debt repayment : this can be instigated by you, or in conjunction with assistance from an approved money advisor. There are also various debt management companies who advertise their services fairly extensively but charge a fee.  Generally speaking, the plan is to offer creditors a regular weekly/monthly sum that you can afford, divided amongst creditors according to the value of each debt.  Your creditors will be requested to cease applying interest although there is no guarantee that they will do so, and you cannot force them.  The risk is that creditors will reject your offer. You should also be aware that any agreement will not be legally binding which means that creditors can change their mind at any time.

Generally speaking, unless a reasonable offer is tabled, creditors are unlikely to be supportive.  Thus, although your debts will be settled in full eventually, you will repay them over a longer period of time and probably incur a higher proportion of interest.  However, for many it creates peace of mind and avoids anything more formal.

3. Debt Arrangement Scheme “DAS” : with the assistance of an approved money advisor, a DAS can be considered. Ongoing interest and all liabilities are frozen once the DAS has been approved by the accountant in bankruptcy (State official) and repayment of the full amount of your debt due to each creditor is made over an agreed period of time : normally no more than 7/8 years.  If you own your home, it will be excluded from the process. This option has become more popular in recent years with those who have a regular income flow and whose debts are not excessive.

4. Trust deed : a trust deed is a Scottish insolvency procedure (the English equivalent is an IVA) and typically lasts four years. All debts are frozen upon signing the trust deed and you will be required to pay a monthly contribution from your earned income during the trust deed period, based upon your ability to pay i.e. due regard is given to meeting your essential commitments such as rent, insurance, food and child support.

If you own heritable property with equity that you cannot finance e.g. with help from family and friends, it may well have to be sold such that there is cash to pay your creditors.  However, a home is always looked at with individual circumstances in mind and thus, expert advice should always be sought.

5. Bankruptcy: if you consider that there is no realistic prospect of you ever being able to repay your debts, or cannot afford a monthly contribution such that either a DAS or a trust deed can be considered, bankruptcy may be the most suitable debt solution for you. Indeed, many people prefer the bankruptcy option because it tends to offer greater certainty of outcome.

As with a trust deed, part of your commitment will be to pay a weekly/monthly contribution over a period of four years, with such contribution being varied as your circumstances change during such period.  The State has a standard form, for utilisation across Scotland and to ensure consistency of outcome, which assesses the level of contribution you will be required to pay, and will often lead to a change in some of your lifestyle expenditure in order to comply with the process .  The impact on your heritable property will typically be the same as for a trust deed.

Each person’s circumstances are assessed on their merits because no two people are the same, and this helps to explain why the best option is probably not decided from an internet search but by speaking with someone who has the knowledge/experience to provide advice.  When personal financial troubles exist, do not be scared to discuss them with a confidential advisor because there will always be an answer.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen.  They do not purport to represent those of the firm in general.