Whilst some people are currently saving money, skipping the expensive car trips and costly train tickets whilst they’re working from home, others have found their income cut and their outgoings dramatically increasing. The financial divide is wide, with some people in a stronger position than ever and others in debt and barely managing to cope.
Whatever your current situation – whether you’ve got some spare cash to clear some debt or you’re just keeping your head above water – knowing how to deal with debt during a pandemic could help you come out of it stronger.
To fully understand debt during a pandemic, it helps to know what creditors are doing and how you can stay in control.
How the credit industry has adapted to the pandemic
As you might expect, the credit industry has had to adapt to the current pandemic. Some people simply haven’t had the money to keep up with their existing debts, whilst others have had to borrow even more money to keep paying for their everyday essentials.
Financial situations have been thrown into chaos. If you’re struggling, know that there’s help available from a variety of sources. Contact your creditors to see how they can support you.
Support from the Financial Conduct Authority
The Financial Conduct Authority (FCA) makes sure that the financial industry remains fair and always acts responsibly. It promotes competition and protects consumers, making sure that financial providers don’t leave their customers struggling.
Currently, the FCA is ensuring that creditors act fairly by providing payment breaks to those that can’t keep up with their repayments. If your income has dropped or completely disappeared, you should contact your creditor and they should adapt your payments to your current situation. Your creditor might offer a temporary reduction of your monthly payments, or could put you on a payment break until you’re in a stronger position. If you find communicating with you creditors daunting or confusing, I’ve put together a video step-by-step guide to communicating with debt collectors on my Youtube channel.
Whilst the FCA encourages customers to keep making debt payments where they can, and to restart payments as soon as the funds are available, it will protect debtors by demanding that creditors are flexible. Creditors are expected to respond to the individual needs of their customers, with a range of short-term and long-term options to arrange sustainable solutions.
Greater Flexibility of Debt Products
Right now, people need money. A lot of that money must be borrowed. Of course, in the current environment, few people can commit with confidence to monthly repayments. Who knows what’s around the corner? More than ever, it’s clear that we’re just an unexpected event from our budgets being turned upside down.
Over the next year, we’re likely to see lenders offering more flexibility. They know that their products are needed, and they can find ways to profit from borrowing, but (at least whilst this pandemic continues) they’ll have to be more flexible than usual.
Bailiff Video Calls
If you can’t keep up with debt repayment, you might get a visit from the bailiff. It’s a bailiff’s job to get the money that you owe, by seizing your property or getting you to make a payment. Of course, a pandemic makes a bailiff’s job difficult.
When we don’t want people entering our houses, and when social distancing is so important, a bailiff can’t simply show up at your door and make their way into your home. Instead, a landmark High Court ruling has given bailiffs the right to do their job via Zoom.
Now, High Court approved debt collection agencies can seize belongings via video call. This, of course, requires a cooperative debtor. The debtor will need to give the bailiffs a virtual tour of their home. Then, the debtor can agree a repayment plan. The bailiff puts a hold on any valuable items that they can seize to recover debt, though the debtor can keep these belongings in their home until a later date.
Five main debt solutions
If you’re in debt, you still need to do everything you can to keep it under control. If you can keep making repayments, even reduced ones, you should do so. This pandemic isn’t an excuse to completely ignore all your debts, though you may need to make some changes to how your money’s managed. Consider these debt management solutions:
The snowballing method picks up pace over time. A snowball starts small at the top of the hill but builds speed and size as it rolls down.
With the snowballing method, you start by listing your debts from smallest to largest. The smallest debt will be easiest to clear, giving you more money to focus on the next in the list. As you clear your debts, one by one, you’ll free up money to focus on the next one. As you work to clear your smallest debt, make sure to keep making the minimum payments elsewhere.
Pros: You’ll be able to see your efforts working. You’ll watch as your debts are cleared one by one, and you’ll stay motivated as you free up more money over time.
Cons: Leaving your largest debts at the end of the list does mean that you might pay more interest. If you’re only making the minimum payments, your interest charges could mount up.
Debt Relief Order (DRO)
A Debt Relief Order is an option if you owe £20k or less. These agreements typically last a year, with debt written off at the end. All repayments are frozen for a year whilst you work to get back on your feet. Unless your situation improves a lot, your debts are written off at the end.
Pros: DROs provide a clear way out in the not-too-distant future. You can immediately stop making repayments, once your DRO is set up.
Cons: You’ll need to pay a one-off Insolvency Fee. You may need to return items purchased on credit and you’ll appear on the Insolvency Register.
Debt Management Plan (DMP)
With a Debt Management Plan you make one monthly payment at an affordable level. This payment is split fairly and sent to your creditors, managed by a neutral third party.
Pros: You’ll be able to clear your debts, paying only what you can afford each month.
Cons: You’re likely to extend the length of time you’re in debt.
Individual Voluntary Agreement (IVA)
With an IVA you’ll pay what you can for roughly 5-6 years. At the end of the agreed timeframe, all remaining debt is written off. To pursue this route, uou need to make sure you select an IVA company carefully.
Pros: There’s an end in sight. You can try to clear your debt, but if you can’t manage you know you won’t be stuck with it forever.
Cons: An IVA requires you to be placed on the Insolvency Register. If you own your home, you may be required to release equity.
Bankruptcy allows you to wipe your financial slate clean. You may lose assets, belongings, your home and your car but can break free from debt and start again with absolutely nothing.
Pros: You get a clean slate, with no more debt.
Cons: You may lose your assets and belongings. Your credit file will be badly damaged. You may not even be able to get standard current accounts, never mind other financial products.
What next for debt in the pandemic?
2021 will be another tough year. The pandemic continues and more and more people are finding themselves struggling financially.
It’s likely that 2021 will be a year when people who’ve never struggled financially before must seek help to get control of their debts, or must borrow after using up their hard-earned savings.
Through 2021, remember to find out what benefits you are entitled to. This may be a year to take what you can, seek help when you need it and admit if things aren’t going to plan. Remember that creditors must act responsibly, without causing distress for their customers, and that in the middle of a global pandemic there are understanding people all around.
Many thanks to Scott Nelson from MoneyNerd.co.uk for this excellent guest post. Scott is a financial services expert, with over 10 years’ experience in the industry. Troubled by the lack of moral conscience in the industry, Scott decided to use his insider knowledge to give genuine advice to those struggling financially. He’s recently moved out of London to the rural area of Malvern to pursue this ambition.