The Two Choices in Debt Consolidation UK

Debt consolidation in the UK is a growing industry. There are two ways to tackle debt consolidation UK-style: the debt consolidation counselors or managers, who will draw up a repayment plan and cut up to 60 percent (sometimes more) off your overall debt immediately; and the people who will offer you a debt consolidation loan (usually a secured loan) which you will then use, presumably, to pay off your debt, wholly or in part.

The first option is the more sensible, as you are not getting yourself into further debt, but rather getting yourself out of debt, literally, by coming up with a repayment plan. The second option is sometimes the more attractive to people, as the people lending you even more money (more debt) will usually find a way to secure more money than the amount of the debt itself, thus leaving you with a tempting cash sum to play around with.

It has to be said right off the bat that this second option can be quite dangerous, as, if it is a secured loan, it will be secured against your property, usually your own home. So if you default on this loan you could have your home repossessed and therefore you and your family could find yourselves homeless and on the streets. It is best to take the first option, that of debt consolidation advice in terms of debt consolidation planning and management.

The only way a loan is preferable is if you can genuinely afford to meet the repayments over a long term. If you are certain that your fortunes are on the up and you are able to repay the loan over the long haul then it makes sense to take out a loan because this will generally mean (almost always) that the repayments of the one big loan will be smaller than the combined repayments for all your other loans. Secured loans, as a rule, involve lower APRs and smaller monthly repayments, simply because they are secured and less of a risk to the lender. They are more of a certainty than unsecured loans which will tend to cost more over time because of the higher repayment installments.

So what is involved in a genuine plan, as opposed to a loan, to handle your debt consolidation (UK laws regarding debts having changed recently)? Firstly, your case will be looked at by a qualified Insolvency Practitioner, or IP professional. IPs are trained in looking at individual cases and working out, from a properly drawn out balance sheet, the income and outgoings of a person or household, and work out a sensible repayment plan from there.

This can take the form of a simple debt management plan, where the total debt is paid over a number of years with a single monthly payment. In some cases it can take the form of what is known as an individual voluntary arrangement (or IVA) which the UK government has created as a solution to personal insolvency without the stigma or trauma of bankruptcy. Debt consolidation (UK legislation having been changed to cater for this) has never been easier.

Here is the really attractive part. If the client is found to be suitable for an IVA the IP will then negotiate with each of the creditors to reduce the level of the debt by as much as 60 or 70 percent. This amount is just written off immediately. So effectively the debt can be reduced by nearly three quarters at one stroke. Then the rest is bundled into one manageable payment every month which the client can afford.

The other great thing about the IVA system is that it is legally binding on the creditors. Once an IVA has been agreed they will not be able to knock on debtor's doors or send them threatening letters. In fact, they are not allowed to contact the debtor in any way. The debt is then written off over five years.