The BBC hit the headlines itself recently. It has been sending out debt collectors during the lockdown. Unsurprisingly, this has not gone down well. It is, however, a timely reminder that the reprieve from debt sanctions is only temporary. With that in mind, now seems a good time to look at the situation and the available options.
Payment holidays have been extended
Payment holidays have been extended, but there are two catches. Firstly, borrowers are only guaranteed a holiday of up to 6 months. After that, their lender simply has to abide by the standard regulations around fair treatment and forbearance. Secondly, the lender can still apply interest during the holiday period.
Most renters can stay in their homes until March
There are some exceptions to this. For most people, however, the earliest a landlord could have served an eviction notice was 20th September 2020. Most parts of the UK currently require a landlord to give six months notice, hence physical evictions can only restart at the end of March.
Considering your options
In theory, there is only one question to consider. Are you able to make the minimum repayments on all of your debts while also paying your essential living expenses? If yes then you are solvent, if no then you are insolvent. With COVID19 (and Brexit), however, the situation becomes a bit more nuanced.
People may fluctuate between solvency and insolvency according to their work situation. Their best way to deal with this, however, may depend greatly on their personal situation. For example, people with assets, such as family homes, may wish to avoid insolvency, at least until they can sell them. People without assets, by contrast, might be more willing to go insolvent.
Insolvency may prove to be the best course of action for some people. It is, however, still not a decision to be taken lightly. The days of debtors’ prisons are over, but the damage to your credit record can have long-term repercussions. What’s more, you’ll need to go through the usual discharge process. This isn’t penury, but it is limiting.
Insolvency means more than bankruptcy
Bankruptcy is one form of personal insolvency, but it is not the only one. The main other options are an Individual Voluntary Arrangement and a Debt Relief Order. For completeness, these options exist throughout the mainland UK but may go by different names (and slightly different rules) in Scotland.
It’s best to get professional advice before you decide whether or not to go insolvent, let alone which form of insolvency to choose. As a rule of thumb, however, IVAs are best suited to people with assets and DROs are best suited to people with minimal debts and no assets. Bankruptcy is the remaining option if you are not suitable for either an IVA or a DRO.
Staying solvent (just)
At present, anyone looking to deal with debt should definitely keep their eyes and ears open for any news of schemes to assist people struggling financially. On the whole, however, you should probably focus most of your attention on standard debt-management strategies.
Most debt management revolves around the concept of “snowballing”. Essentially, you use all your disposable income to reduce your highest-interest debt. Then when it is gone you move on to your next highest-interest debt and so on until you are debt-free.
There are a couple of potential twists on this. For example, if you have no savings at all, it can be wise to put together a savings pot to ensure you don’t have to worry about getting more credit if anything happens. Also, if you have accounts with small balances, it can sometimes be helpful just to pay them off first and close them.