Debt management: the flexible approach?

12 September 2008

Debt management can be a very formal process - but that doesn’t always have to be the case. While it’s true that debt management should always be taken very seriously, some methods are less formal than others, and as such, different debt solutions will suit different people.

Here we compare the different types of debt management, and how flexible each of them are.

Debt management plan
When you enter into a debt management plan, you will work together with your debt adviser and your creditors to work out a means of paying off your debt that you can afford (whilst still remaining fair to your creditors).

Your debt adviser will take a look at your circumstances, and taking into account how much money you have left over after paying essential living costs, will help decide a suitable amount to be divided between your creditors.

The main advantage of a debt management plan is flexibility. It’s not legally binding, like some other forms of debt management, and the terms are not set in stone: you will have your circumstances reviewed every so often, and your payments can change accordingly (not only making them lower, but making them higher if your situation improves, thus paying off the debt more quickly).

There is a downside to that, though: your creditors are still perfectly entitled to change their minds at any point, and you will still have to repay the whole debt. It’s also highly likely that you will be left with very little (if any) disposable income for the duration of the debt management plan.

Debt consolidation
Debt consolidation is, in one way, more flexible than a debt management plan: to an extent, you can decide how much you want to pay each month. For example, if you have £5000 of debt, you could choose to repay that over 5 years (£83 per month + interest) or 2 years (£208 per month + interest) – depending on your own financial situation and how much you are comfortable paying.

On the other hand, once your repayments begin, it’s unlikely you will be able to change the terms of the debt consolidation loan. If your finances take a turn for the worse, you will still be expected to keep up on payments, or face the consequences. In this respect, debt consolidation is less flexible than a debt management plan.

IVA (Individual Voluntary Arrangement)
As an alternative to bankruptcy, IVAs are understandably less flexible than other methods of debt management. As a legally-binding agreement between you and your creditors, you will be expected to make regular payments, usually for 5 years, and if you are a homeowner, you may be expected to release some of the equity in your home. If you cannot continue to meet the terms of the agreement, it may be possible, depending on the circumstances, to apply for a variation. However this must be put to a vote of the creditors (in the same way the original agreement is made), and therefore it is possible that, if rejected, you could face bankruptcy, and a further blow to your credit rating.

You will not be expected to repay the full amount of your debts on an IVA, and the debts will be considered settled at the end of the 5-year period – but for those 5 years, you will have to be fully committed to making repayments, and you will have no disposable income in that time.

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