Getting out of debt; Debt solutions explained

If you are swamped by debt there is help available. Below are six options to help you decide which could be the best solution for your situation.

We explain which of the options freezes interest, the options that give debt relief and those that stop the creditors chasing you around the block for your debts!

Not all of the options will apply to you because it depends on your level of debt you have, what assets you have and how much spare cash you have after paying your essential bills.

1. Informal Arrangement for getting out of debt

If you are struggling with debt, your first option must be your creditors. Explain your circumstances, request that they freeze interest and charges and try to negotiate reduced payments with them. There is no guarantee that a lender will be obliging but at least discuss your situation with the lender.

2. Debt Management Company (DMC)

You could employ a debt management company to do the negotiating with the creditors for you. The firm will act as a go-between for you and your creditors. The debt management company will contact the lenders on your behalf and draw up a debt plan between you and the lenders. When the debt plan is ready you pay the debt management company monthly payments and they will distribute payments to your lenders. If you take this option make very sure you approach a reliable debt management company. There are debt management companies to avoid! You can also approach a charity organisation for free help.

3. Debt Consolidation

Debt consolidation is where you obtain a new loan, either from the bank or through a secured loan on your property, in order to pay off your existing debts such as credit or store cards. This option can be useful if you can get a new loan at a far lower interest rate than credit agreements you are currently paying. You then consolidate your debts and your situation becomes more manageable. The disadvantage with this option is that, if you opt for a secured loan, you will be securing any debts on your house – putting your home at risk should you default on payments.

Make sure you do your calculations correctly: if your new loan has a longer term that your previous debts you could end up paying more in interest over the long run.

4. Individual Voluntary Arrangement (IVA)

An IVA is a contract between you and your lenders whereby you make a proposal which outlines your current financial position and make the best offer you can afford, either from current income or from a third party contribution in settlement of all your unsecured liabilities. Contributions are usually paid each month, typically over a period of three to five years. A one-off lump sum payment can also be made. If the IVA is accepted by lenders, then the arrangement is legally binding on both you and your lenders and no further interest is added from the date the arrangement begins.

Once you have completed your part of the contract (providing the terms of the IVA are complied with) the lenders have no recourse over that debt and it is deemed to have been legally discharged, any outstanding debt is written off.

5. Debt Relief Orders

Debt relief orders are a form of insolvency for people who have a certain amount of debt, little disposable income and few assets. A debt relief order will help to place the least complicated debt discharge cases on a fast-track through the court system.  No personal appearance at court required.

6. Bankruptcy as a solution to getting out of debt

Please be warned.  Going bankrupt is not a ‘get-out-of-jail-free card. Every bankruptcy case is decided on its merits and your case will be assessed to see if you can make a payment under an Income Payments Agreement (IPA) for a period of 36 months from the date of your bankruptcy order. Your conduct prior to going bankrupt will also be scrutinized to see if you were culpable by taking on credit knowing you could not pay it back. This could include actions such as gambling or paying back family and friends ahead of normal lenders. The official receiver could make you subject to a bankruptcy restriction order and not release you from bankruptcy for a number of years.

On the positive side, bankruptcy is a lawful way of discharging your unsecured debts and it works for many people.

All these options, except for option3 where you pay creditors in full will affect your credit rating negatively.