Overdraft Debt

Overdraft debts can be a particularly insidious type of debt that can creep up on you if you are not careful, or if circumstances mean that you start to rely on your overdraft to fund your day-to-day living expenses.

The more you rely on using your overdraft, the higher the interest charges that you have to pay.

It can mean getting into a cycle of debt from which it can be difficult to escape.

What is overdraft debt?

An overdraft is like a safety net for your account. It allows you to get access to and use more money than is currently in your account – up to a given and agreed overdraft limit. That all sounds fine until you look at the implications in more detail.

It’s important to remember that an overdraft is a type of unsecured debt and that banks can ask for an overdraft to be repaid on demand. If that happens to you, it could be a real problem if you do not have the funds to meet that demand.

Also, it’s worth bearing in mind that overdrafts can often have higher interest rates than other ways of borrowing. In addition to fees for the creation and administration of the overdraft itself, which can make them an expensive way to borrow money.

How does an overdraft work?

You may receive an overdraft automatically with a new current account, or you may have to request one.

An arranged overdraft is where your bank agrees that you can spend more money than is in your account, up to a certain limit. You’ll be charged interest while you’re using the overdraft, but there won’t be any further charges to pay.

An overdraft is a form of credit that can be taken away at any time, without notice, by your bank.

Overdraft Debt Write-Off

Your overdraft is connected to your bank account and acts as a form of borrowing. However, they usually have very high interest rates attached to them so can be an expensive way to get credit. If you’re worried about your overdraft debt there are several solutions, including possibly getting it written off.

Can You Get Overdraft Debt Written Off?

Overdraft debt is similar to many other kinds of debt and can be written off through insolvency solutions such as an IVA or Bankruptcy. An IVA stands for individual voluntary arrangement and is a formal agreement between you and your creditors to repay what you can afford over time. At the end of the IVA, any outstanding debt is written off and this could include any remaining overdraft debt. On average, we expect to write off about £10,500 for our clients upon successful completion of their IVA.

Another option which would write off overdraft debt is bankruptcy. Overdrafts, similar to most other types of debt, are included within a bankruptcy agreement. Debts which will not be written off in bankruptcy include:

• Magistrates court fines;
• Maintenance payments and child support payments;
• Student loans and social fund loans.

However, going bankrupt is not a decision to be taken lightly as it is also likely you will have to sell assets such as your home to pay back what debts you can.

However, IVA and bankruptcy should only be considered if you have unsecured debts over £6,000 for an IVA, and £5,000 for Bankruptcy. If you have debts under this level (and it is just overdraft debt) there are other ways of managing it without entering into these formal solutions. Although this won’t write off your overdraft debt it can make your money go much further when it comes to paying it back.

Contact Your Bank

The first thing to do is speak to your bank, they are required to treat customers sympathetically under the Standards of Lending Practice. This means they could come to a solution based on your circumstances. They might allow you to switch to an interest-free overdraft or investigate clearing your debts through a personal loan.

Start A Budget Which Includes Overdraft Repayments

Before you start the budget, you’ll need to work out how much owe. Once you’ve worked how much you’ve got coming in and going out, put it into a budgeting app or calculator.

This can help you keep track of your money and make sure you have enough to make your overdraft repayments. If your budget makes you realise you don’t have any money left to make the repayments, try going on a comparison website to make your bills cheaper.

Organisations such as MoneySupermarket.com could help you switch providers and save thousands that you could put towards clearing your overdraft.

Use Savings To Pay Off Your Overdraft

If you’re sitting on savings but have an overdraft, then you could use these funds to repay what you owe.

Saving accounts do not usually earn the amount the interest in your overdraft costs you each year. For example, an overdraft which costs £2,000 with £40 a month interest costs £480 annually.

If you’re lucky, your savings will be making around £26 each year. This means it might make sense to dive into the savings account and use the money there to pay off the overdraft.

Switch Your Overdraft To A Year’s 0% Interest-Free Deal

Some banks offer interest-free overdraft accounts for a year. Using one of these, you can use the 12 months to clear your overdraft debt without the sum increasing. Make sure you do pay it off in 12 months though because after that you pay 39.9% EAR (equivalent annual rate).

Transfer Your Overdraft Debt To A Credit Card

If you’re always in your overdraft – more than £1,500 – then it may make sense to move the debt to a 0% interest-free credit card. For a fee of about three to four per cent of the amount you are transferring, you can use a money transfer card to pay cash into your bank account.

This means your overdraft will be clear and you’ll owe the card at 0% interest.

You can enter an endless debt cycle

What other problems are there with overdraft debts?

Apart from the fact that the bank has the right to ask you to pay the overdraft back immediately, and at any time, there are other disadvantages associated with overdrafts such as:

• You will in almost all cases be charged interest on your overdraft (even if you do sometimes get an initial interest-free period)
• There can be set-up charges for some overdraft arrangements; and, in some cases, yearly arrangement fees
• High charges and fees are applied to any unarranged overdraft (where you have exceeded the amount of money in your account, or any overdraft limit that applies to it)
• Overdrafts are an expensive way of borrowing money if you are continually in your overdraft
• Banks may (or may not) honour a transaction if you accidentally go over your overdraft; so payments from your account may fail
• Overdraft debts that were once easy to manage can quickly become unmanageable if your circumstances change and you find yourself relying on it for day-to-day living
• An overdraft can drive you into an endless cycle of debt

Explore options with your bank

What should you do if you are faced with large overdraft debts?

Dealing with overdraft debts can be difficult when you are also trying to meet your day-to-day living expenses and household bills.

If you have a current account with the same bank that is providing your overdraft facility, then it’s probably a good idea to explore your options with them.

Some possible ways forward might include:

• Setting up a new basic bank account for you
• Helping you to reduce your overdraft in a structured way, taking account of your other debts
• Separating any overdraft(s) from your existing account (by opening a new basic account)

Ringfence your income

Overdraft Facilities

A basic bank account is one which comes without an overdraft facility, but it should allow you to set up standing orders and direct debits; you usually get either a debit or a bank card too.

A basic bank account can be a good option to discuss with your own bank initially. If that does not work, then you can seek to open a basic bank account with another bank that you do not have any debts with. Usually opening such an account does not entail any credit checks against you.

If you are wrestling with overdraft debts, and your bank is unable or unwilling to help, you should prioritise your household bills and living costs (such as Council Tax, heating, food etc) and make sure your income is available to you without the bank helping itself to it first.

That is why it can be a good idea to protect your income by setting up a basic bank account with another bank to ringfence your income: that way you get to control what happens to your money.

Don’t panic

What if I am dealing with other unmanageable debts as well as overdraft debts?

It is quite often the case that people struggling with overdraft debts are also trying to deal with a range of other unsecured debts too.

This simply reflects general financial difficulties that anyone can find themselves in, given the right set of circumstances. If this is you, don’t panic, there are ways of dealing with such situations.

Debt Arrangement Scheme

One way, if you live in Scotland, is a Debt Arrangement Scheme (DAS). Set up by the Scottish Government, the Debt Arrangement Scheme is a useful alternative to insolvency.

It is an effective way of preventing aggressive court actions being taken by creditors including HMRC, banks, etc. and it allows you to manage your unsecured debts and work your way to a debt-free and much happier future.

Protected Trust Deed

Other options we can explore with you include a Protected Trust Deed if you are dealing with unsecured debts of £5,000 or more, and you live in Scotland.

A Protected Trust Deed will help you pay off your debts while making life much easier for you and those close to you.

Although it is a form of insolvency, it is really simply a formal agreement between you and your creditors.

Bankruptcy

If you are a resident in Scotland and have over £1,500 of unsecured debts that you cannot pay back, then bankruptcy may be an option for you.

It gives you a way out of what can be seemingly overwhelming debt. Filing for bankruptcy in the right circumstances, can be the correct thing to do.

It is best to take expert advice before considering bankruptcy.