Debt relief options

September 20, 2011

Debt has become a serious problem for many households. In recent years, people have had to rely more heavily on credit to make ends meet. Unfortunately, unless credit is repaid in full within a relatively short period of time, credit cards, loans and overdrafts can easily turn into a debt crisis. Fortunately, various solutions are available to those who are struggling to effectively manage their debts.

Debt Management Plan

The debt management plan ought to be the debtor`s first port of call when it becomes obvious that outstanding credit is no longer affordable. Generally speaking, the sooner a debtor realises there is a problem the sooner he can implement measures to control it – in this case, the first step towards solvency is discussing the situation with creditors.

Although some creditors are unwilling to accept anything less than the agreed repayments, others are more relaxed about providing solutions to debtors. Ensuring that creditors are aware of debt problems enables debtors to explore ways to minimise monthly repayments – enough, perhaps, to control the situation before it becomes a crisis.

Sometimes, more extreme measures have to be discussed with creditors. A debt management plan is an informal agreement between a debtor and his creditors to repay outstanding balances on credit accounts such as loans and credit cards within a fixed period of time or at an agreed weekly or monthly rate.

Strictly speaking, debt management plans are not legally binding, but the common law of England and Wales does make provisions and exceptions for those who rely, to their detriment, on promises made by creditors. Debt management plans are usually the preferred option for borrowers who can afford to repay outstanding debts at a lower premium, but it ought to be noted that creditors would almost certainly remove credit (e.g., terminating credit cards) as a result of entering into such an agreement. Defaults are also likely to appear on credit profiles.

Individual Voluntary Arrangement (IVA)

The IVA has made a name for itself over recent years, as many lenders have criticised its apparent bias towards debtors. Although the IVA does favour debtors to a certain extent, it is by no means a desirable solution unless circumstances are such that a debt problem is no longer manageable.

As a legally binding agreement, the IVA is somewhat different from the debt management plan. Essentially, the IVA works by ensuring that a debtor reaches an agreement with his lenders to repay a proportion of his debt within a fixed period of time. Assuming the debtor does not renege on the terms of the individual voluntary agreement, any outstanding unsecured debt will be expunged or written off after the agreed period of time (typically five years) elapses.

An IVA should only be considered if a debt problem is out of control. Remaining on a debtor`s credit profile for six years, an IVA reduces the amount of debt a person is required to repay but tends to limit an individual`s ability to secure credit in the future.

Bankruptcy

When a debt problem is truly unmanageable it may be necessary to consider bankruptcy. As with the IVA, bankruptcy leaves a long-lasting smirch on an individual`s credit profile, but it is sometimes the only option for low-income individuals whose debts are substantial and assets minimal. Bankruptcy means going to court and facing severe financial penalties for many years (e.g., a bankrupt may face problems opening a bank account and is not allowed to be a company director).

Finally, people who have endured debt problems in the past are likely to experience difficulties securing credit in the future. Rebuilding a credit profile takes time and patience.

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