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How to Write Off Debt? Will it Affect Debt Credit Rating?

Is it possible that you can write off debts? Your creditor might agree to write off your debt to some extent. Well, it completely relies on the situation you are in. Like how you handled the debts to clear off the debts.

Everyone wants to get rid of their debts. Some people get frustrated with their debts and they can’t arrange any more money by selling anything. Even some people lose their jobs and without a proper source of income they can’t pay off their debt. 

What does it Mean by Write Off Debt?

When the creditors write off debt, they mean that they are considering only one or a part of the debt cleared off. The creditor looks into matters like whether you are permanently unable to work, have an extreme illness, or lost the job. 

So, if you are seriously going through circumstances like the above-mentioned terms, you can ask your creditor for writing off the debt. If the terms and conditions are available for your creditor, then it might agree. The creditors mainly agree with your circumstances to write off debt if they find the following:

  • When they are sure that they won’t get regular repayments on behalf of you.
  • When you show them proper evidence that you can’t pay off them, anymore.
  • You are left with no asset that you can use to sell and repay the creditors.

Most of the creditors are likely to agree to write off debts in serious cases. They might ask you to show a proper medical certificate before writing off the debt. But some creditors might extend the period of debt and don’t ask you for the repayment for a certain period of time.

What do the Creditors do with the Debts of People with Mental Health?

If any customer is dealing with mental health issues, he or she can ask the creditor to write off the debt. In case you are one of them, then the creditor might write off your debt. Hence, you have to contact social care or health care workers. That social or health care worker has to fill out a Debt and Mental Health Evidence Form.

Therefore, you need to submit that form to your creditor. The creditor will then handle the situation in a more considerable way.

Will Writing Off Debt Affect Credit Rating?

Once you are able to write off debt fully, the credit history of yours gets marked. If you had missed any repayments and didn’t pay the minimum amount, or if your account defaulted, then the mishaps are marked on your history for six years.

Sometimes, creditors opt for a full and final settlement as well. Here, you need to pay off the debt in a lump sum of money only after a certain period of months. The credit history will have a partial payment.

There is no guarantee that the creditors will definitely write off your debts. They might agree on the basis of how you can pay back the remaining debt. Mostly, creditors settled with a partial payment to clear off the debt, rather than considering a full writeoff debt.

Ways to Write Off Debts:

Around the UK, there are several ways of insolvency debt solutions available. Bankruptcy, Debt Relief Order, and Individual Voluntary Agreement are insolvency debt writing-off solutions in England, Northern Ireland, and Wales. Whereas, Scotland uses the Trust Deed, Sequestration, and Minimal Assets Process to deal with the debt write-offs.

1. Bankruptcy

If you can no longer afford the repayments of the debt, you can easily make a fresh start with bankruptcy. This process is legal and can be suitable for your financial circumstances. The advantages and disadvantages of bankruptcy are mentioned below.

Advantages of Bankruptcy:

Let’s check out the pros of this insolvency debt solution.

  • You can get rid of your unsecured debts through bankruptcy.
  • The creditors can’t proceed with any legal action against your bankruptcy.
  • They have to terminate interest charges, demanding payments, and other charges.
  • Your creditors will stop connecting you, furthermore.

Disadvantages of Bankruptcy:

Besides some benefits, bankruptcy has some risks, too. Here the risks of this process are cited below.

  • Your property and assets might include your bankruptcy.
  • Legal and financial jobs might get affected.
  • Your credit history will have a negative impact because of bankruptcy. The record might vanish after six years.
  • A public register will have a record of your bankruptcy.

2. Debt Relief Order (DRO)

You can get benefit through this process when you are struggling with a small amount of debt and left with a few assets. Hence, you need not repay the debt along with the interest for twelve months. 

Benefits Associated with DRO:

You can’t skip the repayment but Debt Relief Order might help to deal with the debts. Here are the advantages of DRO go as follows.

  • You need not pay anything for the upcoming twelve months. Then, the debt writes off.
  • This process is an alternative to bankruptcy but with more effectivity.
  • The creditors can’t force you to pay off the debt.
  • This is a legal process of debt insolvency.

Risks Associated with DRO:

The risks and cons of this Debt Relief Order are as follows.

  • You have to owe less than £20,000 to apply for DRO. Moreover, you have to be a permanent resident of Wales, Northern Ireland, and England. You can’t apply for DRO if you live in Scotland.
  • You have to pay a nominal charge of £90 to start off the DRO process.
  • Additionally, you are ineligible to apply if you have a house in your name.
  • Like bankruptcy, DRO will also have a side-effect on your credit history. Also, the public register shows that you have applied for a DRO.

3. Individual Voluntary Agreement

This enables you to repay the debt through affordable payments for five to six years. After this scheme, the debt usually writes off. You can also down payment the debt via a lump sum payment once.

Pros of Individual Voluntary Agreement (IVA):

There are loads of advantages to choosing IVA rather than choosing bankruptcy or DRO. Go through the advantages and decide whether you need this scheme to write off debt.

  • The creditors allow you to clear off the debt to some extent by paying monthly installments. Make sure that the installments are affordable enough.
  • In addition to this, you don’t require to pay any fees before the IVA settles.
  • You can even keep your house if you are able to maintain the mortgage payments.
  • You can pay the creditor the installments. But you can also clear off the repayment by a full and final settlement policy. Then, arrange a big sum of money rather than monthly payments.
  • When you are done with paying off your last monthly installment, the creditor writes off the debt. Your creditor can’t force you for further payments.

Cons of Individual Voluntary Agreement:

There are certain risks associated with IVA policies. Have a look at them before you opt for IVA.

  • You have to again mortgage your house if you had equity release on your house. This might enhance the interest rate.
  • If you can’t remortgage your property, pay for another twelve months.
  • In case you fail to continue your IVA, the creditor might ask for your bankruptcy.
  • IVA will provide a negative effect on your credit history.
  • Creditors generally don’t approve IVA schemes.
  • A public register holds the record of IVA.
  • Only unsecured debts get written off once your IVA completes.

4. Sequestration

This suits you the best if you are unable to pay off the debts within the decided time period. This applies to you if you live in Scotland. Find out if Sequestration is suitable for you by going through the advantages and disadvantages of this insolvency.

Advantages of Sequestration:

The benefits of this insolvency match with that of bankruptcy.

  • The creditor can write off debts within a short duration of time.
  • You might have to repay a small amount compared to your debts.
  • The creditor will then stop chasing you.
  • You can get your unsecured debts written off.

Disadvantages of Sequestration:

Find out the risks related to sequestration cited below.

  • You might have to sell your assets like your vehicle, house, etc to write off debt.
  • It might impose a threat to your current source of income.
  • It might get difficult to access credit in the future. The credit history will mark sequestration for six years.

5. Trust Deed

This legal agreement only applies to the residents of Scotland. According to a protected trust deed agreement, you have to pay reduced installments for about four years.

Trump Cards of Protected Trust Deeds:

Let’s see what the benefits of this solvency are.

  • Pay off the repayment only for four years. Contact an insolvency practitioner to make your creditor agree with this scheme.
  • The creditor can’t take you to the court as this is a legal process.
  • You might need to sell some of the assets. But you can keep an essential vehicle of yours. Make sure that the vehicle should not cost more than £3000.

Pitfalls of Trust Deeds:

Let’s have a look at the cons of trust deeds.

  • Pay a wage to the insolvency practitioner.
  • The act of trust deed might affect your employment.
  • In case you fail to repay the payments, then it can lead to bankruptcy.
  • Credit rating lowers due to trust deeds.

6. Minimal Asset Process Bankruptcy

If you can’t clear off the debts within a reasonable time, then you can apply for Minimal Asset Process (MAP) bankruptcy. Hence, you might apply for the scheme through only a certified money advice organization.

Advantages of MAP Bankruptcy: 

This legal process can’t cause imprisonment. Find out additional pros of this process.

  • You have to pay a nominal charge of £90 when you are applying for MAP.
  • After applying for MAP, the debt writes off after a duration of six months.
  • Your creditors can’t chase you for money anymore, once you are done with the MAP.
  • You are allowed to write off unsecured debts only.

Disadvantages of MAP:

This process has the below-mentioned cons, like other debt settlement plans.

  • Credit rating affected.
  • You might encounter a frozen bank account.
  • There are chances that you might lose your current job.
  • You can’t repay your student loans, other loans like this.
  • You might not be able to apply for MAP if you are self-employed.

Consult with an Advisor

Before deciding any plan to write off debt, you should get advice from some experts. The advisor will then help you to handle the situation with more efficacy. Let’s have a look at how the debt advisor can help you.

  • Provides advice on how you can manage your money.
  • Delivers more confidence when you are short in cash.
  • Decides the best debt settlement plan for you.
  • Check whether you are getting all your entitled benefits.

Consulting with your debt adviser is the first step to write off debt. Feel unhesitant to open up to a debt adviser and get your debt written off as soon as possible. After that, your debt adviser can contact your creditor and ask to write off your debts if possible.

Disclaimer: This website nationaldebtlines.co.uk is in no way related to Step Change Debt Charity or approved by the Government. However, the product (IVA) which we specialise in, is processed and managed by Insolvency Practitioners under the following legislation: The Insolvency Act of 1986 (amended by the Insolvency Act 2000 and the Enterprise Act 2002) introduced a new procedure whereby a debtor could come to an arrangement with his/her creditors to pay his/her debts in full or in part over time as an alternative to bankruptcy.
The Insolvency Service, an independent government agency, has produced a guidance leaflet on dealing with your creditors. In some cases and with some debt solutions a proportion of debt can be written off. The amount written off will depend on your circumstances, income, level of affordability, assets and the current write-off policy of your creditors.