The term ‘debt solution’ includes a wide range of methods to deal with debt; however, solutions broadly fall under the following categories:
- Individual Voluntary Arrangement (IVA)
- Debt Management Plan (DMP)
- Bankruptcy
- Debt Consolidation
Individual Voluntary Arrangement (IVA): An IVA is a voluntary arrangement reached between you and your creditors for the repayment of your debts. As part of the arrangement your debt is reduced, normally by freezing interest. Secondly, the monthly repayment amount is made more affordable, more in tune with your current income. The repayment period is usually spread across five years, subject to the condition that you have remained true to the agreement. Once it comes into effect, an IVA is legally binding to both parties, which means, your creditors can not hassle you or file for bankruptcy against you.
Debt Management Plan: A Debt Management Plan (DMP) involves the reducing and restructuring of your debts such you are able to make a more affordable monthly repayment to your creditors. A debt management company negotiates with your creditors on your behalf. Once an agreement is reached, you pay a single monthly instalment to the company, who then distributes it to your creditors. The solution is ideal if your debt situation is temporary and you have a regular monthly income to pay the loan. A DMP is different from an IVA in that it is not legally binding.
Bankruptcy: In extreme cases you can file for bankruptcy, wherein your debts will be written off and you will be free of your debts within 12 months however you may have to make monthly income payments for 3 years. As part of the bankruptcy proceedings your assets, such as property, car, furniture and other valuables are seized and sold to repay the creditors. There are serious consequences of bankruptcy and it should be considered only as a last resort.
Debt Consolidation: If you have a lot of unsecured debt you can take one large loan to pay it. The advantage is that instead of making multiple payments you just need to make one monthly payment. Debt consolidation reduces the overall amount of your monthly repayments and makes budgeting far easier. The important thing to remember here is that large loans normally require collateral in the form of your home/other property.
Debt Relief Order: A Debt Relief Order (DRO) is similar to bankruptcy but are designed for those with minimal assets and surplus income. A DRO is not available if you are involved in another formal insolvency solution such as an IVA or bankruptcy proceedings.
County Court Administration Order: A County Court Administration Order is made by the court under which you must make payments from your income directly to the court. The court then distributes funds between your creditors on your behalf.
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