If you’re losing sleep over money worries then you need to take action for the sake of your long-term health as well as the long-term wealth you could potentially have if you take action to resolve the problem. While you need to pull your head out of the sand quickly and make a commitment to tackling the issue as a priority, you also need to allow yourself enough time to look at it calmly and objectively and to get proper advice before you take any big decisions. Here is a very quick guide to the steps you may wish to take.
Work out whether or not you are actually solvent
Get your financial paperwork together, look through it carefully and work out whether or not your income is sufficient to cover the minimum payment on your debts and still leave you enough for a decent, basic standard of living. Do this thoroughly as it is really important. For example, get out your actual receipts, especially for your “big shops” and work out whether your money is actually going on genuine essentials or if non-essentials are finding their way into your trolley.
If it is, then you are solvent and you need to work out a strategy for paying down your debts as quickly as possible so you can breathe easily. The standard strategy is to limit your expenses to the minimum and use all your spare funds to pay down the highest-interest debt. Once you’ve paid this down, you move on to your next highest-interest debt and so on. This is commonly known as “snowballing”.
If it is not, ask yourself if there is a reasonable chance that you could either increase your income or decrease your expenses so that it did. If the answer is yes, then you can go through the snowballing process described above. If the answer is no, then see if you could if your creditors would reduce or waive the interest payments and if the answer is yes, try speaking to a debt-management charity to see if they could help you to negotiate with your creditors to arrange that. This type of arrangement is commonly known as a debt management plan, which is different from a debt-relief order.
If you cannot afford to repay even the principal on your debts, then you really are insolvent
If your income is not enough to repay even the principal on your debts, then you really are insolvent, however, this does not mean that you should necessarily jump straight to bankruptcy. If you have equity in your home, then you might be best-served to sell your home on your own terms and put the profits towards clearing off your debts and starting again. Not only can this give you more money than you would have received had the property been foreclosed, but it will keep your credit record clean, which can be very helpful if you are looking to rent.
Alternatively, you might want to look into the possibility of entering into an “Individual Voluntary Arrangement”. This is an insolvency arrangement but it is possible for you to keep your home, which is the main benefit of them. Having said that, they are definitely not to be taken lightly and your home is still at risk if you fail to meet the conditions of them.
If you do not own your own home, or if you do, then you may still have another option before bankruptcy, which is a Debt Relief Order. This is similar to bankruptcy but only applies to those with a maximum of £20,000 debts and no assets. If all else fails, then, bankruptcy may genuinely be the right option for you, but, as is hopefully now clear, you should generally explore all other avenues first.