Hi Liz
There are different ways that you can solve a debt problem. The solution you choose will depend very much on your personal circumstances. I have tried to sumarise the 4 ways of dealing with debts below. However, before you decide which is the best, I advise that you spend some time looking at the various debt advisory web sites. You should also speak to 2-3 different professional companies to get their advise.
I hope this helps
1. Consolidation
Very often, the first solution people consider is consolidation. I.e. taking a loan to pay off multiple smaller debts and leaving yourself with a single lower monthly payment. This could be done either by taking an unsecured loan or releasing a lump sum of equity from a property.
On the face of it, consolidation sounds like an ideal solution. However, very often it does not solve a serious debt problem. This is for two significant 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 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 the cards and your overdraft to supplement your income and 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.
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.
2. Informal Repayment Plan
Where your debt is typically less than £15,000, a sensible option might be to consider an Informal Repayment 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 will take further action against you such as an application for a County Court Judgement or Charging Order against your property.
If you have the time (and generally a very thick skin) you can negotiate an informal payment plan with your creditors yourself. However, this can be very difficult and time consuming. As such there are companies available who can help you with this.
3. IVA
Where your total debt exceeds £15,000, an alternative solution may be to consider an IVA (Individual Voluntary Arrangement). This is a more 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-£300. 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 little or 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 (although you might have to make payments towards your debt to the court for up to 3 years). 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.
The significant downside to bankruptcy is that if you have property, then the Court has the right to take such an asset 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!
James Falla
Expert in IVA, Bankruptcy and informal Debt Management solutions, with extensive experience of solving personal debt problems over the past 10 years. I am regularly featured on BBC News, Finance Programs and Radio.
Visit my blog at:
http://jamesfalla.blogs.iva.co.uk
