Financial talk

“I’m in debt. How do I get out of it?” It’s a common question these days, and a problem that’s made no easier by today’s economic troubles. But whatever debts an individual is facing, they’re likely to have at least one debt solution available to them.

Here, we take a look at just four debt solutions: debt management; debt consolidation loans; IVAs (Individual Voluntary Arrangements) and Trust Deeds. To some people, they’re just names – but to others, they’re a path back to financial stability. So how do they work? What’s the difference between them? Perhaps most important: which one could be right for me?

Let’s start with debt management.

Basically, debt management means negotiating with creditors, asking them to agree to a few changes to the repayment terms. It’s easy for your circumstances to change in ways that mean you simply can’t keep up with payments as originally agreed. You may have lost your job, had a baby, or seen your mortgage payments shoot up. Or maybe your debts simply got out of control.

Whatever the reason, it’s in your creditors’ interest (as well as yours) to find a realistic way for you to repay your debts, and a professional debt management organisation can help make that happen. They can contact your creditors on your behalf, asking them to consider things like accepting lower payments, freezing interest and waiving charges. So debt management might mean your debt takes longer to pay off (because you’re paying it back more slowly), but it can keep it from escalating out of control.

Who debt management is right for: people who can’t keep up with monthly payments to their unsecured debts.

Next: debt consolidation loans.

Rather than struggling to keep up multiple payments to multiple debts, many people choose to consolidate their debts – taking out a debt consolidation loan that’s big enough to pay them all off. This means they’ll only have one payment to make per month, reducing the risk of missing payments (and the charges and damage to their credit rating that can result).

Plus, a debt consolidation loan can come with a lower interest rate than many other forms of unsecured credit. It can also give the individual the chance to think about their finances and arrange to repay the debt consolidation loan at a rate they can afford – again, repaying a debt more slowly will mean it takes longer to pay off and can end up costing more, so it’s vital to weigh up the pros and cons before proceeding.

Who debt consolidation is right for: people who want / need to reduce their monthly payments.

Third: IVAs.

A form of insolvency, an IVA is a legally binding agreement between a borrower and their creditors. If you owe around £15,000 or more to multiple unsecured creditors, an Insolvency Practitioner (IP) can tell you whether an IVA might be the best way for you to get out of debt. If they think it is, they can draw up an ‘IVA proposal’, detailing how much you can afford to pay towards your debts every month for the next (normally) five years, once you’ve taken your essential expenses into account.

If enough of your creditors agree, the IVA can start. You’ll agree to make those monthly payments (and possibly free up some equity in your home, if you’re a homeowner), and they’ll agree to freeze your debt, hold off on any legal action (such as trying to make you bankrupt) and write off any outstanding debt once the IVA has successfully concluded. Please note: an IVA will have a serious impact on your credit rating, potentially making it harder to borrow money for the next six years.

Who an IVA is right for: people who owe three or more unsecured creditors a total of around £15,000 or more and can’t afford their monthly repayments – but can afford regular smaller payments.

Fourth: Trust Deeds.

A Trust Deed is similar to an IVA, but only available to residents of Scotland. In most cases, a Trust Deed will last for three years.

Who a Trust Deed is right for: residents of Scotland who owe three or more unsecured creditors a total of around £10,000 or more and can’t afford their monthly repayments – but can afford regular smaller payments.

Finally, no debt solution is ‘right’ for everyone. If you’re in debt, it’s vital to talk to a debt specialist who understands all the available debt solutions and can help you choose the one that’s right for you.

Read more about debt management, debt consolidation, IVAs and Trust Deeds at http://www.thinkmoney.com/debt/