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Tax credit overpayments can often result in a demand for payment from you, which can bring unwanted financial difficulties. For some this can be manageable, for others not so. If you find yourself in this situation then it is important that you know how to deal with your debts. This post will provide you with an overview of the main debt solutions.

Going bankrupt

Going bankrupt is usually considered the most consequential option for dealing with your debt. This is simply not true. The most consequential is doing nothing or choosing the wrong solution.

In its most basic form going bankrupt is one way in which you can wipe your debts, subject to some restrictions, to obtain a fresh start. Your assets will be shared out among your creditors and there will be an investigation into your affairs. I will explain more in the next post titled “What is bankruptcy?”.

Proposing an Individual Voluntary Arrangement (IVA)

An IVA is a legally binding agreement between you and your creditors. With the help of an authorised insolvency practitioner you will put forward a proposal to your creditors offering to repay a specified amount of the debt over a specified period of time. If approved and providing you have adhered to the terms of the agreement you will be debt free at its conclusion.

An IVA will typically involve you making monthly payments and/or making a lump sum payment. You may be expected to release equity in your property. During the IVA your creditors will not be able to commence legal action to recover the debts. An IVA will typically last five years.

For further information on an IVA take a look at the R3 leaflet Is an IVA right for me? It compares the IVA to bankruptcy.

Debt Management Plan

A debt management plan is usually arranged by a debt management company who will assess your financial situation and then contact your creditors to structure repayment of your debts at an affordable amount. You will make one payment to the debt management company each month who will then distribute the agreed amounts to your creditors.

A debt management plan is not usually legally binding on your creditors and repayment will be expected in full. Many organisations charge a monthly fee for arranging this kind of solution and make a profit whilst doing so. A debt management plan will usually only be suitable as a short term solution.

Refinancing

Refinancing can take a number of forms. It involves using new finance to make your existing repayments more affordable. This is most commonly achieved by consolidating your debts using either a secured loan or an unsecured loan. The objective is to reduce your monthly repayments to a more affordable amount and/or to reduce the overall amount of interest that you will have to pay.
Refinancing will usually be an option if you have an income and a reasonable credit rating. A remortgage is an example of refinancing. It is essential that you seek advice if you are to consider refinancing, it is not the low risk option that it is often perceived to be.

Income maximisation

Income maximisation is often overlooked. It simply entails you increasing your income and reducing your expenses. The objective is to increase the amount of money that you have to repay your debts and hopefully bring you within your budget. This type of solution is only viable if you have a small deficit in your monthly budget. Adopting an income maximisation strategy to your finances is good practice in any case.

As you can see there are a number of solutions available to deal with your debts, even where tax credit overpayments are part of the problem. The most important step you can take is to seek advice. The sooner you do this the less consequential your debt problem will be. There are a number of charities that you can seek free help from including:

• National Debtline
• Citizens Advice Bureau