There are various different types of debt help available, all of them designed to get people out of different situations. If you are in debt, the list of debt solutions can often sound intimidating, so it is important to understand each option, before deciding what to do. Debt advice may be all you need to help you on your way to a debt-free life. Many debt management organisations offer free debt advice, such as budgeting tips.
As well as giving you advice on where you can improve your finances now, when you contact a professional debt adviser, they will be able to assess your situation, and talk you through a plan of action for the future. The debt adviser could also advise you on whether or not you require a debt solution, and if so, which solution might be best for you.
Debt management plan
A debt management plan may be right for you if you can’t make the agreed repayments to your unsecured debts. Debt management involves negotiating with your unsecured creditors, to try and agree a smaller monthly payments based on your disposable income (income minus essential expenditure).
Debt management plans can be useful for people whose disposable income is not enough to repay their unsecured debts. However, it is important to note that creditors are not obliged to accept any changes to the existing repayment plan – nor are they obliged to stick with them after they have agreed to the changes. Be aware that reducing your monthly payments means you will be paying your debt off for longer. It may mean that you end up paying more overall, due to the interest added to your total debt each month.
It is also important to note that when you enter a debt management plan, you are defaulting on an original agreement. This will show up on your credit rating, which could then affect the cost and/or availability of credit for 6 years. You can create your own debt management plan, and negotiate with creditors on your own. However, debt management plans are also available from professional organizations.
Debt consolidation could be the right way out of debt for you, if you have multiple debts and you would like to turn them into one manageable debt. Debt consolidation works by taking out a loan to pay off all the money you owe in one go (so all your creditors get all their money back at the same time). Instead of having several payments to make each month, you will now have one.
A potential benefit of a debt consolidation loan is that you can reduce your monthly payments by arranging to repay the debt consolidation loan more slowly than you would otherwise have repaid your debts. However, it is important to note that due to interest, this may lead to you paying more overall. Debt consolidation loans would not be suitable for people who aren’t sure they could commit themselves to making the loan repayments.
IVAs (Individual Voluntary Arrangements)
If your overall unsecured debt stands at around £15,000 or more, then an IVA could be an appropriate alternative to bankruptcy. An IVA may be suitable for people who don’t think they can repay their debts in a reasonable period of time – but want to avoid the risks of bankruptcy, such as losing their home.
When you enter into an IVA, you enter an agreement to make regular monthly payments (of a pre-arranged amount) to your Insolvency Practitioner. Therefore, an IVA is not appropriate for people who feel they cannot commit to regular monthly payments. The new agreement must be accepted by 75% of your creditors (by debt value*). If it is accepted, the agreement becomes legally binding for (in most cases) 5 years.
In the 54th month of the agreement, homeowners may be required to release some of their equity, so they can repay more of their debt. Once the IVA has come to a successful end, any remaining unsecured debt will be written off. The IVA will then stay on your credit report for one year, which can make further credit more expensive, and more difficult to obtain.
If you want more information about the types of debt help available, it might be wise to contact a professional debt adviser. The right debt adviser will be able to advise you on how to deal with your debts.