Choosing the Right Debt Solution

If you're looking to get out of debt, choosing the right debt solution is important. Each debt solution is designed to suit people in different situations, and the right choice can make a big difference to how quickly - and how easily - your debt problems are solved.

Debt management plan

If you are struggling to repay your debts under the current terms but think you may be more able to repay them at a slower pace, a debt management plan could help. A debt management plan is an informal arrangement between you and your creditors which allows you to make smaller monthly payments towards your debts.

It is possible to arrange a debt management plan by yourself, but this can be time-consuming, since it involves a lot of negotiation with creditors. Many people prefer to arrange their debt management plan through a professional debt management company, who will negotiate with creditors on your behalf, meaning there is no effort required on your part.

Usually, a debt management plan will involve an agreement to repay your debts at a more manageable pace. You will make a single monthly payment to your debt adviser, who will distribute this amongst your creditors on a pro rata basis (i.e. according to how much they are owed).

Debt consolidation loan

A debt consolidation loan is particularly effective for people with multiple debts who want to reduce their outgoings and/or simplify their finances.

A debt consolidation loan is used to pay off all your existing unsecured debts, after which you will make single monthly payments to your new lender. It's possible to reduce your overall outgoings by spreading repayments over a longer period, although you may pay more in interest than on a shorter repayment term. That said, if you consolidate high-APR debts (e.g. credit cards), you could still find yourself saving money on interest overall.

However, a debt consolidation loan should not be taken lightly. It is still a form of debt in itself, and you should always be certain that you will be able to afford your repayments. If you're not, then another debt solution may be more appropriate.

IVA (Individual Voluntary Arrangement)

An IVA is typically for particularly serious debt problems - usually £15,000 of debt, or higher.

An IVA is a legally-binding agreement with your creditors that allows you to avoid bankruptcy by paying off a pre-agreed percentage of your debts, and write off the remaining debt.

Before an IVA can begin, an Insolvency Practitioner will work with you to put together an IVA proposal, which will then be forwarded to your creditors. Creditors accounting for 75% of your debt must approve this proposal for the IVA to go ahead.

Once the IVA starts, you will make regular monthly payments to your Insolvency Practitioner, who will divide it between your creditors accordingly. On successful completion (usually after five years), your remaining unsecured debt will be written off.

It's important to note that if you're a homeowner, you may be expected to release some of the equity in your home in the 54th month of the IVA, and you may also be asked to contribute at least half of any increase in income while the IVA terms are in place.