May 23rd, 2009 | 
Author: For people struggling with problem debts, it can come as a great relief to know there is plenty of help out there.
Debt solutions help hundreds of thousands of people every year. There are a number of debt solutions available, all aimed at helping people in different situations. If you’re looking to tackle your debts, it pays to have an understanding of how each debt solution could help.
Debt management plan
A debt management plan is usually most appropriate for people with multiple debts that have become unmanageable. It is an informal agreement with your creditors for lower payments towards your debts each month, allowing you to repay your debts at a more manageable pace.
Debt management plans can be arranged by you, but a lot of people prefer to use a debt management company, who can do the hard work on your behalf. A debt management plan requires potentially lengthy negotiations with your creditors, so many people feel this is best left to an experienced debt management company.
As well as negotiating for lower monthly payments, it’s often possible to have your interest and other charges frozen or reduced, which can make a significant difference to the overall amount you pay.
Debt consolidation loan
A debt consolidation loan is typically most useful for people with multiple debts that have not necessarily become unmanageable, but that the borrower feels could be managed more effectively by ‘consolidating’ the debts into one.
It’s possible to reduce your monthly payments with a debt consolidation loan by spreading out repayments across a longer period. However, you may end up paying more this way, since you will be paying interest for longer than you would have on your original agreements.
Even so, you could still pay less interest overall if you are consolidating credit cards or other high-APR debts.
Remember: before applying for a debt consolidation loan, you should be completely confident that you can afford your monthly payments. It is still a form of debt, and the consequences of defaulting on payments remain the same as with any other debt.
You should also be certain that you will not be tempted to spend more money on the debts you are trying to reduce. For example, if you are paying off your credit card debts, it can be very tempting to use your card again – but this can lead to even more debt, since you will still have to repay your new loan.
IVA (Individual Voluntary Arrangement)
An IVA is useful for people with more serious debts. If you do not think you can pay your debts in full within a realistic timeframe, then an IVA may be able to help.
An IVA is a legally-binding debt solution that enables you to avoid bankruptcy by agreeing to pay off a set percentage of your debts. At the end of your IVA (usually after five years), the remaining debt will be written off.
Before you can enter into an IVA, you will work with an Insolvency Practitioner to draw up your proposal, which will then be sent to your creditors. This must be approved by creditors accounting for at least 75% of your debt for the IVA to go ahead.
Once your IVA starts, you will make regular monthly payments to your Insolvency Practitioner, who will divide the money amongst your creditors accordingly.
If you receive any increase in income while your IVA is in place (e.g. salary rise, bonuses or commission), you will usually be required to give up most of this money to put towards your IVA.
Also, if you are a homeowner, you may be expected to release some of the equity in your home in the 54th month (half way through the final year) of your IVA.
Before deciding on an IVA, consider the implications – while it can help many people with serious debt problems, it will have a significant impact on your credit rating that could prevent you from obtaining credit in the medium to longer-term.
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