When you first get into a debt problem situation with unsecured debt, you may have picked up the advice that you should notify all your creditors about your problems. I'm sure that this is a good idea, but don't expect it to change the way that your creditors deal with you. In most cases they will pass your details to their own debt collecti... Read more
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What Is a Debt Problem? A problem with unsecured debt can be identified by the fact that you have difficulty making your monthly payments, or that these are taking an unreasonably large proportion of your income. Note that you may have a debt problem even if you make your payments regularly. A classic sign of debt distress is using credit from one source to make payments on other debts. This is a so-called "debt spiral" that can very quickly get out of control. What Solutions are Available? The following solutions relate to the UK, and specifically England and Wales. Going it alone - You could write to you creditors and explain the difficulties you are in, negotiate reduced payments for a period of time and basically deal with everything yourself. This would be suitable if you have a very small debt problem, or you anticipate it being over very quickly. It is not advised for large/long-term debt problems. Debt Management Plans - This solution involves using the services of a debt management company to negotiate with your creditors on your behalf. They will question you about your finances and work out how much you can afford to pay after allowing for living expenses. These are best for people with mid-sized debt problems but have the disadvantage that you can end up paying off your debts over a very long period of time. They are also not legally binding on your creditors and you debt management company will have to get all of your creditors to agree to the plan. Individual Voluntary Arrangements (IVAs) - IVAs are the big growth area in the debt management industry. They require a Licensed Insolvency Practitioner to agree the proportion of your debts that you will pay off over an agreed period (or as a lump sum). They are suitable for people with severe debt problems (over £20,000 total debt) and can avoid you losing your home. An IVA will have a severe and lasting impact on your credit score so is not an option to be taken lightly. Bankruptcy - The oldest and most extreme form of debt solution. All of your debts will be written off but you will suffer a lot of intrusion into your personal finances. You will only be able to use certain types of basic bank accounts and if you have a home it may have to be sold to pay back money to your creditors. The law has been relaxed recently meaning that the period of your bankruptcy should be much less than it used to be (typically less than a year) but this solution has the most serious impact on your future credit score. It is a good solution for people with a severe debt problem that do not have own major assets (e.g. homes, cars) as it is usually the quickest way to become debt free. Conclusion Whatever debt solution you choose there is no need to pay a company upfront for any of the above solutions. Make sure that any company that helps you only charges if their advice is successful. Make sure that you get your debt advice free!
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