Debt solutions: a comparison
Are you in debt but unsure what to do about it? Perhaps the best way to start would be to talk to a debt adviser about your situation. If necessary, they can help you compare the different debt solutions which may be available to you, so you can identify the one that can get you out of debt and back in control of your finances.
Before you do, you might like to take a look at three of the debt solutions they may mention: debt management, debt consolidation and IVAs (Individual Voluntary Arrangements).
Comparing debt solutions
You may know someone who`s had experience of one of these debt solutions in the past. Whatever their experience - whether it was a good one or a bad one - this doesn`t mean this debt solution will or won`t work for you. Everyone`s situation is different, so the approach that works (or doesn`t work) for one person could work out very differently for someone else, even if their situations seem quite similar.
Debt management
Debt management means talking to your unsecured lenders and asking them to consider changes to your repayment terms. If you can`t keep up with your repayments, it`s in their interest as well as yours to agree on a way you can repay your debts at a rate you can afford: they may agree to accept lower payments, freeze/reduce interest and/or waive charges.
Some people contact their lenders themselves, while others will ask a professional debt management organisation to do it on their behalf. Either way, repaying any debt more slowly will obviously delay the day you`re debt free and can (unless the interest rate comes down by enough) end up costing you more in total, as it`ll be accruing interest for longer. Plus, failing to repay a debt as originally agreed can have a negative impact on your credit rating, which can make further credit harder to obtain and more expensive.
Even so, that could be a lot better than the alternative - depending on your situation, this could involve fines, threats of legal action, visits from bailiffs...
Debt consolidation
Many people with multiple debts `consolidate` them by taking out a new loan large enough to pay them all off at once. When they do this, they`re left with one (larger) debt, rather than multiple (smaller) debts. This makes it a lot easier to stay on top of their monthly payments (since one loan is simply easier to keep track of than multiple loans), so they should be less likely to end up being charged for missing payments.
In addition, many debt consolidation loans come with lower interest rates than the debts they`re used to pay off.
Perhaps most useful, debt consolidation can give you a chance to re-assess your finances and the rate at which you can afford to repay your debt. If necessary, you can arrange to repay the loan over a longer period of time - although this can, as mentioned earlier, increase the total amount to be repaid (unless the interest on the debt consolidation loan is significantly lower than the interest on the debts which it paid off).
Plus, debt consolidation isn`t appropriate for people who aren`t sure they could afford the repayments, whether that`s because their income is low or because it isn`t reliable enough.
IVAs (Individual Voluntary Arrangements)
An IVA is a form of insolvency and a legally binding agreement between a borrower and their unsecured lenders. It could be a good way for you to reduce your monthly payments and clear your debts, giving you a date when you know you`ll be debt free.
If you owe multiple lenders around £15,000 or more in total and you can`t afford your monthly payments, it`s worth talking to an Insolvency Practitioner (IP), who can examine your situation and advise you on whether an IVA could be the right way forward for you.
If they believe it is, they`ll work with you to draw up an IVA proposal, which shows how much you`ll be able to repay per month once you`ve taken your essential expenses (mortgage/rent, utility bills, food, etc.) into account.
If this proposal is accepted (at the `creditors meeting`) by lenders who collectively `own` 75% of your unsecured debt, the IVA can go ahead. As long as you can maintain your payments throughout the IVA, the outstanding debt will be written off once the IVA has reached a successful conclusion.
Please note, though, that homeowners will probably be required to release equity from their property towards the end of the IVA. Plus, entering an IVA will affect your credit rating for six years (from the time it starts), which can affect your ability to get credit during the first year after the IVA has finished.
Help comparing debt solutions
Understanding all the pros and cons of the different debt solutions isn`t easy. If you`re wondering which one could be right for you, a professional debt adviser will be able to help you make the right decision.
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