Debt problems? Benefits of professional help

14 April 2009

If you`re facing debt problems, don`t underestimate what a debt specialist could do for you. At the very least, they may be able to `point you in the right direction`, whether that means providing a few tips on budgeting, supplying sample letters and templates and/or answering your questions about debt.

In many cases, there`s a lot more they can provide. They may be able to negotiate with your lenders, arrange lower monthly payments, reduce the interest you`re paying, even write off some of the debt you`re carrying.

How? Depending on which organisation you approach, the debt professionals there may be able to offer a range of debt solutions - a debt management programme, debt consolidation loan or IVA (Individual Voluntary Arrangement), to name just three.

They should also be able to advise you on which debt solution (if any) might be right for you. When you`re facing debt problems, your finances might suffer if you fail to take any action - but taking the wrong action can do even more damage to your financial health.

Here`s a brief look at three debt solutions: debt management programmes, debt consolidation loans and IVAs.

Debt management programme

Debt management involves negotiating with your unsecured lenders, explaining that your financial situation has changed since you borrowed from them and asking them to help you repay your debts by allowing you to do so in an affordable way. If you can`t maintain your payments as they stand, they may agree to:

• accept lower monthly payments,
• waive charges, and / or
• freeze / reduce the interest rate they`re charging.

Some people choose to negotiate with their lenders themselves, but others ask a professional debt management organisation to do it on their behalf. Different debt management organisations may offer different levels of service - and some will charge a fee for this.

Note: repaying any debt more slowly is likely to add to the overall cost, as it means the debt will have more time to accrue interest - unless the lender agrees to freeze the interest they`re charging (or reduce it sufficiently). It can also damage your credit rating, as it means you`ve not stuck to the original repayment agreement and the lender may therefore issue a default notice.

Debt consolidation

A debt consolidation loan is a simple idea that can help people with multiple debts - it`s a single loan big enough to pay off all their debts (except their mortgage). This can:

• reduce the interest they`re paying, especially if they use the loan to pay off high-interest debts such as credit cards.
• reduce the amount they`re paying each month, as they`ll be able to reassess their finances and arrange to repay the loan at a rate they can afford.
• greatly simplify their finances - making one payment a month is much easier to remember and budget for, and can reduce the chance of damaging their credit rating and / or incurring fines for late / non-payment.

Note: again, repaying debt more slowly is likely to add to the overall cost - unless the debt consolidation loan comes with an interest rate which is significantly lower than the original debts which it was used to pay off. As with any loan, it`s important to make sure you can afford the repayments before you commit yourself.

IVA (Individual Voluntary Arrangement)

An IVA is a legally binding agreement between a borrower and their unsecured lenders. It can reduce the amount you`re paying towards your unsecured debts every month, and will write off the debt you can`t afford to repay. Most IVAs last 5 years.

The borrower agrees to:

• make fixed monthly payments for the term of the IVA - the maximum they can afford once they`ve taken into account their essential expenses (mortgage, food, heating, light, etc.), and
• release (if they`re a homeowner) equity from their property in the 54th month of the IVA (halfway through the 5th year).

The creditors agree to:

• accept those payments, even though they`re lower than the ones the borrower should be making,
• not pursue any legal action against the borrower (including trying to make them bankrupt), and
• write off any outstanding debt once the IVA has come to a successful conclusion (i.e. if the borrower maintains those payments all the way through the IVA and fulfils any other requirements, such as releasing equity).

Note:

• An IVA cannot go ahead unless lenders who collectively `own` at least 75% of the debt agree to the terms laid down in the IVA proposal which the individual and their Insolvency Practitioner have drawn up.
• An IVA isn`t an option unless the borrower cannot afford their payments to their unsecured lenders, but can commit to making reduced payments throughout the IVA.
• In most cases, the borrower must owe multiple lenders a total of at least £15,000.
• An IVA will have a serious impact on the borrower`s credit rating, affecting their ability to obtain credit for 6 years (from the time it began).

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