A breakdown of different ways to manage debt

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A breakdown of different ways to manage debt

5th July 2010

Debt can be a damaging problem to an individual, and to a family. Debt puts many strains on people as they try their best to get the cash together to pay for the constantly increasing numbers, due of course, to interest.

Debt, however, doesn’t have to be a problem that ruins your life. There are now many services available to help you. There are also many methods you can use to minimise your debt, and take steps towards efficient payment of your debts.

One method is using an informally negotiated arrangement with your creditors. This works in the sense that, in usual circumstances, you will work out offers of payment to your creditors on a pro-rate distribution of your available income. Essentially, this means that your creditors are given a fair share of exactly what you are able to actually pay. In the case that you can come to this understanding with your creditors, you should also request that interest and charges are frozen.

In the instance you come to an informally negotiated arrangement with your creditors, and you have no available income, there may be what’s known as a ‘moratorium’. A moratorium occurs when there is no available income, and so no debt is paid back. In this instance, a token payment of £1 a month is paid to each of your creditors.

If an arrangement like this cannot be reached, there is also the option of implementing a debt management plan. A debt management plan requires you to have £100 or more available each month, in disposable income, to pay to each of your creditors. And in this instance also, you must have three or more creditors.

A debt management plan means that you make an agreed monthly payment to a free debt management firm, who will distribute the payments to your creditors for you. This is most certainly a fair and transparent means of distributing your payments, but you must remember that this will affect your credit rating.

Recently, more and more people have been turning to an IVA to help them with their debts. IVA’s have become more widely understood to be an alternative to going bankrupt. An IVA is an ‘Individual Voluntary Arrangement’, which is a completely formal arrangement through the country court for you to pay a fixed and agreed amount of all of your debts, over a period of time as short as five years.

An IVA will write off any other debts, but in order to obtain this you will need an insolvency practitioner.

IVAs will need to be arranged and agreed by the majority of all of your creditors, by value of the debt. IVAs offer less stigma and publicity than bankruptcy, but again it will affect your credit rating. It might also involve you paying a cost of over £4,000.

Alternatively, bankruptcy might be your only option. You are able to petition for bankruptcy, or this can be done by a creditor. This means that all of your financial affairs will be dealt with by the official receiver.

There are many ways to deal with debt these days. All is not lost, and any of these methods might be able to help you solve your debt problems.

Posted in Debt management

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