Debt management

How better debt management can help you avoid bankruptcy

There is so much debt advice available that can help you avoid bankruptcy. This article explains a few of them, how they work and how they can be used to help you get out of debt for good.

What is a debt management solution?

This article will focus on professional debt solutions that have grown in popularity with the recent economic climate, but any way of coping with your outstanding balances could be classed as a debt management solution. Many simple measures to manage problem finances would be covered by the adviser when you seek impartial debt advice, which is always recommended if you are struggling with your outstanding unsecured balances (personal loans, overdrafts and credit card debts).

Debt Management Plans (DMPs)

DMPs have grown in popularity as more people have needed to seek alternative solutions to solve their debt problems. A Debt Management Plan works by creditors agreeing to accept reduce payments over a period of time. Multiple unsecured balances are gathered in to a single monthly payment, which simplifies finances and makes them easier to manage. Reputable debt help companies, like The Debt People, Hamilton Locke and Chiltern, will then distribute this payment between your creditors on a pro-rata basis.

As part of their service, they will also renegotiate payments to a more affordable level and seek to re-schedule payments over a longer period of time - thus making finances more affordable.

They may also be able to get the charges and interest on your balances stopped. Whilst only unsecured debts can be included in a DMP, the budgeting and debt advice you receive can ensure that you maintain payments towards your secured debts and tax or utility arrears. (Unsecured debts are those that are not secured against assets or property, and include personal loans, overdrafts, catalogues, store card and credit card debts.)

Debt Management Plans are classed as a flexible solution, as they enable changes to be made to repayments if your circumstances alter - so if you receive a reduced income through illness or after losing your job, you can reduce payments accordingly to ensure the plan is still affordable to you.

Likewise, if you receive a pay increase or promotion you can increase your payments and repay your debts quicker. There are no contracts on a debt management plan either, so if you no longer need the arrangement you are free to cancel whenever you wish. This means that if you need to regain control of your finances whilst still repaying your debts, you could opt for a DMP to help you through the difficult financial period.

Alternatives to debt management

Individual Voluntary Arrangements (IVAs)

An Individual Voluntary Arrangement (IVA) is a legally-binding agreement between you and your creditors to pay off as much as you can realistically afford over a fixed period of time - typically 5 years. After the IVA term, all remaining unsecured balances are written off.

IVAs were first introduced by the Government in 1986 as a way of helping consumers (you) to avoid the disadvantages and stigma that bankruptcy presents, along with helping the people that you owe money to recover more money than they would have managed to retrieve under Bankruptcy laws.

In a similar way to a DMP, IVAs gather all outstanding unsecured balances into a single monthly payment. As an IVA is a legal agreement, a qualified Insolvency Practitioner will be required to offer impartial IVA advice and ensure the IVA proposal covers all legalities. The monthly payment that you make towards your IVA is based on affordability. This works by your Insolvency Practitioner calculating your disposable income.

Your disposable income is the amount you have available each month once priority payments (rent/mortgage, council tax, travel to work, food etc) have been deducted from your monthly household income. IVAs have a number of advantages including:

Free from hassle - all correspondence is done via your Insolvency Practitioner so demand letters and calls from creditors will stop.

Simplified payments - all unsecured balances are gathered into a single monthly payment

Privacy - your details are not printed in the open press for all to see (as is the case with a bankruptcy) so your privacy is maintained. However a record is kept on the Insolvency Register.

Additional interest and charges are stopped - once agreed additional charges and interest stops being added.

Career not affected - unlike with bankruptcy, you can still work as a police officer or in careers where handling money is an integral part of the role (like accountants etc).

Protection - the IVA agreement offers you protection from creditors changing their payment demands.

Trust Deed

A Trust Deed is similar to an IVA but for people living in Scotland. All outstanding unsecured balances are gathered into a single monthly and repaid over a fixed period of time, however this is generally over three years - not five as on an IVA. Similarly to IVAs, Trust Deeds enable remaining outstanding balances to be written-off once the Trust Deed term has been satisfied, and monthly payments are based on affordability.

For immediate debt advice or for further information regarding professional debt solutions, please click on the relevant link.

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