Debt Management Guide
Getting into debt is easy to do but getting back out again can often be impossible.
If you find yourself in unmanageable debt then you need to do something about it
before it takes control of your life. The following guide outlines the debt management
options available to you should you find yourself unable to make your debt repayments.
A Debt Consolidation Loan
This type of loan can be used to clump together all of your existing unsecured debts
into one loan. It means that you then only pay interest on one loan and that you
only have to pay one payment out each month. While this sounds great, there are
a few drawbacks as well. Most, if not all debt consolidation loans are secured on
your assets which means your home or any other collateral you offer is at risk if
you fail to keep up the repayments. Thus, debt consolidation loans should be carefully
considered before signing on the dotted line.
A Debt Management Plan (DMP)
Debt management plans (DMPs) are a way of paying off your existing debts at a rate
that you can afford. In some cases the interest charges on your debts will be frozen
so you only pay back what you borrowed. The downside is though that it will take
you much longer to repay your debts this way because none of your debts are written
off. You may also need a specialised company to set the plan up for you and these
charge their own fees which you also need to pay. Debt management plans are not
legally binding either so your creditors can opt out at any time and demand full
repayment of your debt.
An Individual Voluntary Arrangement (IVA)
An IVA is a legally binding contract between you and your creditors which generally
lasts for five years. At the end of the contract terms you are declared debt free
and your current creditors can’t hassle you for any more money. You will need an
insolvency practitioner to compose your creditor proposal for you and these have
to be paid for. Most companies however take their fees out of the money you pay
into your IVA fund. The proposal works out how much you can comfortably afford to
pay each month and this is the only payment you make. If you default on the payments
though there is a chance that your creditors will declare you bankrupt.
Bankruptcy
Bankruptcy is normally the choice for those who are past the other forms of debt
management and can no longer pay their debts in any way. It should always be the
last resort as it affects your credit profile for at least seven years. Being declared
bankrupt puts any assets you have in danger of being seized and you can loose anything
of value, including your home. You should try to use one of the other forms of debt
management if possible but if you can’t then you need to find a good insolvency
practitioner to fight your case.
The bottom line is that debt management needs to start as soon as you realise there
is a problem. Leaving it until it is too late leads to the need for more severe
debt management solutions and at worst the declaration of bankruptcy.