If you are suffering with a debt problem, there are a number of different  things you can consider. I am going to describe them briefly here and expand upon them later.

If you have a poor credit history, getting an unsecured loan at a reasonable rate of interest will be difficult. You should  think very carefully about whether borrowing more money to solve your debt problem. You may be able to consolidate multiple monthly payments into one, but can you afford the single new loan repayment? If not, all that will happen is that you will continue to supplement your income with your credit cards and the balances will increase again. 

1. Consolidation

On the face of it, consolidation seems like a good idea. It may be possible for you to consolidate multiple debts with one larger loan - either unsecured or secured perhaps through are-mortgage.   However, consolidation must come with a health warning. In my experience, 9 times out of 10, consolidation will not solve a serious debt problem. This is for two reasons:  Firstly, you consolidate but then do not change your spending habits. This means that after 18 months or so, the balances on your cards (which you consolidated in the first place) are creeping up again and before you know it you have the consolidation loan payments and new card payments on top and you are back where you started but with twice as much debt.  

Secondly, most people go head long into consolidation because the temptation of reduced monthly payments is very strong. However, if you can’t afford even the reduced monthly payment, then you will continue to use your cards and overdraft to supplement your income. Before you know it, you are back in the same situation again. But this time its 10 times worse because you have the loan as well. 

2. Debt Management Plan or Informal Repayment Plan

Where your debt is typically less than £15,000, a sensible option might be to consider a Debt Management plan. This is an agreement with each of your creditors to reduce the amount you pay to each of them to fit within a budget you can afford. The advantage of this is that you start to repay your creditors in a sensible managed way and stop making things worse by robbing Peter to pay Paul. 

Although on the face of it, this solution sounds good, there are some significant drawbacks. Firstly because you still have to pay 100% of your debt back, it is likely to take you much longer to repay your debts than would otherwise have been the case. Also, the solution is not legally binding. Therefore there is no guarantee that further interest charges will be frozen. It is also possible that your creditors may continue to take further action against you such as an application for a County Court Judgement or Charging Order against your property. 

I would suggest that a Debt Management plan is best used if you need a breathing space from your crediors. If you know that your financial situation is going to improve in the next 6 months or so then the Debt Management Plan may be just the job. However, if you do not expect your circumstances to improve, a Debt management plan will not offer any light at the end of the tunnel.

3. IVA - Individual Voluntary Arrangement

Where your total debt exceeds £15,000, you may be able to consider an IVA (Individual Voluntary Arrangement). This is a formal, legally binding way of dealing with your debt. It allows you to make an offer to settle your debts with your creditors over a 5 year period (no longer than a standard unsecured loan). Further interest and charges are frozen by law and you make just one monthly payment based on what you can afford. At the end of 5 years, whatever debt is outstanding will be written off legally thus leaving you debt free to turn over a new leaf.  

In order to undertake an IVA, you must be able to make a minimum monthly payment to your creditors of c£250. This may be reduced if you are a homeowner and you can release some equity as part of the deal. Releasing equity may not be a very palatable proposition but at least having done this within the legal framework of an IVA, you know that your debts will be totally gone. You also retain full control of your property which is certainly not the case for the final option below.    

4. Bankruptcy

If you have no income in order to make any kind of monthly payment to your creditors and no definite view as to when this might change, then the only way you can solve your debt problem for good is to declare Bankruptcy. In doing this, the Court will take away from you the responsibility of paying your debts. You will normally be bankrupt for 12 months. After this time, any unpaid debt will be written off and you will be able to turn over a new leaf, debt free. 

You will not necessarily get away with paying nothing! If you can afford to do so, the court will ensure that you make payments towards your debt for up to 3 years. This is called an Income Payment Order.

If you rent your property and have no valuable assets (e.g. an expensive car) it is very unlikely that the Court will require you to give up any of your goods. However, if you own a house, then the Court has the right to take this from you and sell it for the benefit of the creditors. If you are a property owner, you must ensure you take further advice before deciding to declare yourself bankrupt!  

This entry was posted on Thursday, January 11th, 2007 at 9:12 pm and is filed under Debt Solutions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.