What Debt Help is Available?
'Debt help' can mean many different things - a debt specialist may be able to suggest various ways you could tackle your debt problems. If you are looking for debt help, it is important that you understand your options before you decide what action to take.
Debt advice
This could be all you need to help you get your finances under control. Various organisations offer free debt advice, such as help with budgeting, or information about which debts are priority and which are non-priority.
When you contact a professional debt adviser, they should be able to offer you advice on where you can improve your financial situation now, and how you could keep it under control in the future.
They may also offer advice on whether a debt solution could help, and if so, which one may be best for you.
Debt management plan
A debt management plan might be suitable for you if you cannot make the agreed repayments towards your unsecured debts. Debt management involves negotiating with your unsecured creditors, asking them to accept lower monthly payments, based on your current disposable income (income minus essential expenditure).
You can ask a debt management organisation to act on your behalf, or do the negotiations by yourself.
Debt management plans can be flexible, which means that if your financial circumstances deteriorate and you start finding payments difficult to make, then you or your debt adviser may be able to re-assess your situation and negotiate with your creditors again, asking them to accept lower monthly repayments.
However, creditors are not legally obliged to accept any changes to the original repayment plan - nor are they legally obliged to stick with them if they do.
Plus, when you enter a debt management plan, you are defaulting on an original agreement. This will be shown on your credit rating for 6 years, which could affect the cost/availability of credit for that time.
Be aware that you will be paying your debt off for longer if you reduce your monthly repayments. It may also mean you end up repaying more than you originally expected - this is due to the interest added to your debt each month.
Debt consolidation
If you would like to turn multiple debts into one manageable debt, then debt consolidation may be right for you.
It works by taking out one loan which will pay off the money you owe to your existing creditors. This means that you will now have one monthly payment to make instead of several.
A debt consolidation loan can also let you reduce your monthly payments by repaying the loan more slowly than you would otherwise have repaid your debts. However, this may mean you end up paying more overall due to the interest.
Note: Debt consolidation loans would not be suitable for people who don't think they can commit to making the loan repayments as well as keeping up with their other commitments.
IVAs (Individual Voluntary Arrangements)
An IVA is a formal agreement between borrowers and their creditors. They are designed to give the borrower an affordable way out of debt, and are often seen as a preferable alternative to bankruptcy.
An IVA may be suitable for you if:
1. Your unsecured debts total around £15,000 or more.
2. You don't think you can repay your debts in a reasonable amount of time.
3. You want to avoid the risks of bankruptcy, such as losing your home.
The IVA must be accepted by 75% of your creditors (by debt value - creditors who collectively 'own' 75% or more of your debt), before it can go ahead. If it is accepted, the agreement will last (in most cases) for 5 years. Once the IVA has ended, any remaining unsecured debt will be written off.
If you can commit to regular fixed monthly payments, then your creditors will allow you to make lower monthly payments, based on what you can actually afford. When entering an IVA, all interest charges are frozen, which means you will know exactly how much you will repay (as no interest is added each month).
However, IVAs also have their drawbacks. For example, it will remain on your credit report for one year after completion, which may make further credit difficult/more expensive to obtain. Plus, if you are a homeowner, you may be required to release some of the equity you own in the 54th month of the agreement. This is so you can repay more of your debt.
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If you want more information on debt management, debt consolidation or IVAs you should contact a professional debt adviser.