Is this a viable way to escape my debt?

woggles97

I went through a relationship breakup earlier this year and my mental health tanked. Over the course of a few months, I went from owing less than £10K, to just over £29K. I understand what the underlying issue is that caused this.

I have a base income of £1,650 p/m, and I have a spare room rented out which tops this up an additional £470 p/m. In total, I bring in just over £2,100.

Here's what I owe:

RBS credit card

- Balance = £5,075 (maxed out)

- Minimum payment = £75

RBS loan

- Balance = £7,400 (this does not include interest)

- Minimum payment = £180 p/m for 59 months

Monzo Loan

- Balance = £6,200 (this includes interest)

- Minimum payment = £180 p/m for 35 months

PayPal credit

- Balance = £3,000 (maxed out)

- Minimum payment = Unknown (repayments haven't started)

Barclaycard

- Balance = £4,950 (maxed out)

- Minimum payment = £210

Capital One

- Balance = £2,450 (maxed out)

- Minimum payment = £25

The minimum I'd expect to pay for these is around £750 p/m.

My outgoings are minimal, but the balance hits £0 after everything is paid for (including the above minimum payments) - there's no room to live. I've been in contact with StepChange and they've advised a DMP as the best course of action (alongside bankruptcy), and that the budget I've set is fair. However, I've spent days reading the forum and going the self-managed DMP route seems right for me as it gives me much desired flexibility.

I don't want to rush into something like bankruptcy, but I have £0 saved and each day is a different challenge trying to balance being happy, with the growing reminder that this debt looms over my head with seemingly no way out. My mental wellbeing crashes when there's no end date, when the fees pile up, when the interest makes it feel impossible, but I feel like I may have found my path that works for me.

My thinking is:

• Stop paying anything towards the amount owed and wait for them to default
• In the time it takes to default (6 months at least), I'll put what I was spending into an emergency fund - 4-5K should be possible at least
• Once all lenders have defaulted, start the process of a self-managed DMP immediately

I understand that this will tank my credit opportunities for 6 years or so. I don't plan on buying a house in this space, and by defaulting and starting a flexible, self-managed DMP, I'll have enough saved to offset any credit desires completely - which is great. Also, unless I'm mistaken, the fact the accounts will be closed is a massive win - I can set and forget a recurring payment.

In theory, from the date of the last lender defaulting, I'd have a clear end. No interest, no fees, no active credit accounts - just a fair payment to them to repay what I owe, but also no chance to take out further credit. I have carried these balances for years, it's time to get them gone and start looking towards a better life for myself.

My plan once this is in place:

• I'll split the £29K over 72 months - this works out to be roughly £400 p/m in guaranteed repayments to my lenders - I can afford to make this payment
• I'll email each lender their share of that amount and set up automatic payments
• Using the remaining £500 p/m, I'll bank that towards making F&F payments - once a lender can be paid off entirely, I'll do so
• Rinse and repeat until I'm debt free

As my main bank is with RBS, I've set up a Nationwide current account for my wage to be paid into as presumably RBS will close the account upon defaulting.

Hopefully my thoughts aren't wishful thinking? I've spent months worrying about how to get out, and this is the only option that I can see that 1) works for me & 2) offers me the flexibility to pay everything back within a timeframe that fits whilst still allowing me to live my life.

I'm still young - early 20s, so being a !!!!!! has made it hard to enjoy the little things - pressing 'reset' and doing the above seems like the right call?

enthusiasticsaver

It sounds like a good plan to me if the £400 is affordable and you are confident to arrange yourself. Hopefully they will all agree to suspend interest. Building an emergency fund, defaulting immediately and asking for breathing space is the way forward so you have access to emergency funds. Not sure how you get to £4-£5k in 6 months though unless you have more spare income than the £400 you are offering your creditors. You are young so you have time to move on from this. Do you rent or do you own a house? 

louie111

A good plan it seems to me. I am in a very similar situation, similar income, similar level of debt, early 20s etc. Not sure if you own your own house however, and how much equity you have available in it? 
If you go down the option of defaulting, yes I would say hold off on payment for a few months, get some coin together and then use this as full and final settlements as soon as possible on the biggest debts, try and get these settlements prior to them being sold on if you get a good deal, don't worry if not. 
If you own your house, have a good level of equity in it, that could be an option if you don't want to ruin your credit score. But then again, why do you need a good credit score if you have a decent mortgage already? Ruining your credit score can actually be a blessing in disguise i've found as it stops you getting into even further debt. 
Don't take what I say as gospel as I certainly have no high horse to talk from being in a similar predicament. 
Good luck.

woggles97

Thanks both! It's good to get other opinions no matter the predicament you're in.

I don't own the house, nor a mortgage. I rent privately and have their permission to have a lodger. My rent won't increase for a good few years, and I have no plans within 6 years to even consider buying a house yet. Seems like a perfect time to get debt free and hit 'reset' so to speak, and actually come out on the other side with a good deposit - enough to buy.

enthusiasticsaver said:

It sounds like a good plan to me if the £400 is affordable and you are confident to arrange yourself. Hopefully they will all agree to suspend interest. Building an emergency fund, defaulting immediately and asking for breathing space is the way forward so you have access to emergency funds. Not sure how you get to £4-£5k in 6 months though unless you have more spare income than the £400 you are offering your creditors. You are young so you have time to move on from this. Do you rent or do you own a house? 

The £400 is the minimum I can comfortably pay to cover my entire debt within the 6 year default period. In reality, I have an additional income (+ £470 p/m) from my lodger that I'd use to bank and make F&F payments as they come. I should be free of debt in just under 3 years sticking to this, even less if there's any good deals they may allow. 

In the period that I wait for defaults, I can put away just over £900 p/m to my emergency fund, hence the £4 - 5K figure.

Once they've all defaulted, my wishful thinking comes in that they'll be OK taking just £400 p/m between them, and not more. My only concern is they might not be OK with the additional income I'm keeping to make those F&F payments, but fingers crossed I can clear any problematic ones to avoid that.

louie111

woggles97 said:

Thanks both! It's good to get other opinions no matter the predicament you're in.

I don't own the house, nor a mortgage. I rent privately and have their permission to have a lodger. My rent won't increase for a good few years, and I have no plans within 6 years to even consider buying a house yet. Seems like a perfect time to get debt free and hit 'reset' so to speak, and actually come out on the other side with a good deposit - enough to buy.

enthusiasticsaver said:

It sounds like a good plan to me if the £400 is affordable and you are confident to arrange yourself. Hopefully they will all agree to suspend interest. Building an emergency fund, defaulting immediately and asking for breathing space is the way forward so you have access to emergency funds. Not sure how you get to £4-£5k in 6 months though unless you have more spare income than the £400 you are offering your creditors. You are young so you have time to move on from this. Do you rent or do you own a house? 

The £400 is the minimum I can comfortably pay to cover my entire debt within the 6 year default period. In reality, I have an additional income (+ £470 p/m) from my lodger that I'd use to bank and make F&F payments as they come. I should be free of debt in just under 3 years sticking to this, even less if there's any good deals they may allow. 

In the period that I wait for defaults, I can put away just over £900 p/m to my emergency fund, hence the £4 - 5K figure.

Once they've all defaulted, my wishful thinking comes in that they'll be OK taking just £400 p/m between them, and not more. My only concern is they might not be OK with the additional income I'm keeping to make those F&F payments, but fingers crossed I can clear any problematic ones to avoid that.

What additional income? 

MidsHollie

Hi @woggles97
a word from the wise.... in December last year I made a choice that raised my expenditure considerably, with the theory of “well, my lodgers rent covers that, and I live in a uni town, so people will always need somewhere to stay”. Cue mid March, they moved out. What I thought was a given wasn’t. Luckily I had arranged my finances so that even without that rental money coming in I could still pay some of my debt. If I were you I would base my calculations on rent rising and not having a lodger. Then anything extra is a bonus

woggles97

Thank you, MidsHollie. Definitely something to keep in mind!

Thankfully I've factored that in. The £400 p/m is from my guaranteed income. Should I lose my lodger, I can continue making payments without cutting back on any essential costs. Alongside that, I signed my rental contract with a 4 year 'no rent increase' condition.

Like you said, the bonus lodger income will allow me to 1) live a little, and 2) bank up and make final payments as they come.

enthusiasticsaver

I don't think you can count the lodger money as additional income as it is not guaranteed. If you have to declare it if they ask for I and E information that is what you need to say. The lodger is there by permission of landlord and no guarantee it won't be rescinded. That will help to offer  F and Fs further down the line. The reason I asked if you owned the house was to check that none of them will be tempted to go after a charge on it. As you don't own it I think the chances of them accepting your offer are good. 

gwynlas

I have a self managed debt plan as going through someone like Stepchange would have meant  disclosing everything. I initially told creditors I was having difficulties making payments and said I could only afford £5 per month to each. I later increased this to more realistic payments some of £50 some £100 as I could afford it. I've ignored requests to complete SOAs and as I'm on a pension they are aware my income is only subject to annual increase. My credit score sufferred but everything is on track for them to be paid off in a few years. I could save money by accepting some final settlements offerred but prefer to pay regularly rather than use large chunk of capital