Debt help: debt management, debt consolidation or IVA?
If you are struggling with debt and looking for a way out, the range of options on offer can be confusing. In some cases, a simple reshuffle of your finances is enough, but in more serious cases, you may want to consider a specific debt solution.
To do that, you’ll need to speak to a professional debt adviser, who can help you to decide which debt solution is best for you.
What a debt adviser will want to know
Before a debt adviser can recommend the most appropriate debt solution for your circumstances, they will need to know a few details about your situation. They will want to know:
• How much debt are you in?
• Can you afford your existing debt repayments?
• How much money are you left with once all your commitments (including bills and other essential costs) have been met?
• Could you cut back on any costs to make your debt repayments more affordable?
If your debt adviser feels it is necessary, they can then recommend a suitable debt solution.
What debt help is available?
A professional debt specialist may be able to offer a range of debt solutions, all aimed at helping people in different situations.
Debt consolidation loan
A debt consolidation loan will group all of your debts into one convenient monthly payment, making your debt more manageable. It can also allow you to spread out your repayments and reduce your monthly outgoings, which can make a big difference to your ability to repay your debts.
It’s worth remembering that spreading out your debt repayments will also mean paying interest for longer, and therefore you are likely to pay more compared with a shorter repayment term. However, a low-interest consolidation loan may be able to reduce the total amount of interest you pay if you are consolidating high-interest debts, such as credit cards.
Before you take out a debt consolidation loan, you should be completely certain that you will be able to keep up with your repayments. Failing to do so could have worse consequences than if you had carried on with your original repayment agreements, since it will effectively mean you have defaulted on another debt.
If you can’t be sure, a debt consolidation loan may not be the best option for your circumstances.
Debt Management Plan
A debt management plan is an arrangement between you and your creditors in which you will agree to make reduced monthly payments towards your debts, based on how much you can afford.
It’s possible to arrange this on your own, but as this can take a lot of time, many people prefer the convenience of a debt management company, who can negotiate with creditors on your behalf.
As well as reduced monthly payments, it may also be possible to negotiate for a freeze on interest and other charges, which can greatly reduce the overall amount you pay.
However, making lower payments will mean it’ll take you longer to get out of debt – and whenever a lender issues a default notice because you’re not sticking to the original repayment terms, this can damage your credit rating, potentially making credit harder to obtain and more expensive. The fact that you are no longer adhering to the original terms will also affect your credit rating.
IVA (Individual Voluntary Arrangement)
If you are struggling with more serious debts – typically £15,000 or higher – an IVA could help you to avoid bankruptcy by agreeing to pay off a set percentage of your debt an at affordable rate. On successful completion (usually after five years), the remaining unsecured debt will be written off – and your IVA will remain on your credit report for one more year.
Before you can enter into an IVA, you will work with an Insolvency Practitioner to draw up an IVA proposal, detailing what each creditor can expect from the agreement. Creditors accounting for 75% of your overall debt must accept this proposal for the IVA can go ahead.
Once the IVA begins, you will make regular monthly payments to your Insolvency Practitioner, who will subsequently divide the money between your creditors as agreed.
Be aware that if you enter into an IVA, you will be required to give up around half of any additional income received while your IVA is ongoing (e.g. salary rises, commission, bonuses etc.). Also, if you are a homeowner, you may be required to release some of the equity in your home in the 54th month of the IVA.