Residents of the UK have several debt management plans available to them. These range from informal arrangements with creditors to formal programs like Individual Voluntary Arrangements and bankruptcy.
Each plan is designed for a different situation and each has positive and negative aspects. Review the debt management plans pros and cons below to identify which popular programs may be appropriate and then contact our professionals for help.
Pros – One single affordable payment, interest and charges stopped and frozen, all pending legal action, letters and phone calls stopped.
Cons – Credit rating affected for the medium to long term but the chances are your credit rating is already low and or will be affected if you do not reduce or consolidate your debts with a debt management plan.
Informal Arrangement (IA)
An informal debt management arrangement is an agreement between the debtor and creditors regarding regular payments made for debts over a certain period. The debtor contacts his or her creditors and asks each one to accept lower regular repayments.
No need to involve a third party No cost to establish if financial circumstances of debtor worsen, lower repayments may be possible.
The debtor must do the work of contacting each creditor Creditors are not obligated to accept an IA Creditors can cancel the IA at any time If financial circumstances of debtor improve, creditors may expect repayments to increase Small repayments may not cover interest or other fees, increasing debt amount and time to repay it.
Individual Voluntary Arrangement (IVA)
An IVA is a formal agreement with creditors to repay all or part of debts over a certain period. Regular payments are made to an authorized debt specialist called an Insolvency Practitioner (IP). This person distributes the agreed-upon amount each creditor.
No specific level of debt required to qualify No minimum or maximum repayment amount Allows consumers to repay only what they can afford Interest and other charges usually cease during IVA IP handles contacting creditors and getting them to agree to the IVA Creditors are not permitted to take action against a debtor with an IVA IVA applies to all creditors, even those who did not agree to it.
Only an authorized debt specialist can establish an IVA IP charges a fee for creditor negotiation and IVA management Debtor must provide information regarding debts, creditors, expense, assets, and income Creditors representing more than 75 percent of debts must agree to the IVA IVAs are listed on the Individual Insolvency Register, making it more difficult to purchase with credit, get a loan, or open a bank account.
Debt Management Plan
A debt management plan is an agreement between creditors and a debtor for a fixed monthly repayment that is managed by a third party debt management company (DMC). The debtor provides a single monthly payment to the DMC, which submits the agreed-upon amount to each creditor.
DMC negotiates with creditors DMC manages debt payments on behalf of the debtor Monthly payment is based on how many debtors can afford Creditors may agree to freeze interest charges One regular monthly payment covers all debts Included creditors or their representatives will most likely stop contacting the debtor Once plan is completed, included unsecured debts are cleared.
Only consumers with ample money left over after paying essential expenses will qualify Creditors not obligated to accept a debt management plan Creditors who do not accept the plan can take further actions Debt management plans only cover unsecured debts Debts must be repaid in full (nothing is written off) Some DMCs charge a fee for their services.
Debt Consolidation Loan
A debt consolidation loan is used to repay existing debts. Consumers should shop around for the best interest rates and terms offered by reputable lenders. Some services match debtors with loans used to consolidate debt. A bank or building society may allow consumers to use a personal loan to repay outstanding debts.
A long-term debt consolidation loan may have a lower interest rate than rates for existing debts Monthly payment amount can be reduced Outstanding debts are repaid Only one monthly payment and one lender Loan end date represents financial freedom goal Loan may prevent debtors from falling behind with payments.
A loan secured against the home places property at risk for repossession Could pay more money overall and pay over a longer time Consumers with poor credit may only qualify for a high-interest rate or secured loan Costs involved in establishing and repaying loan Could be difficult to negotiate a new repayment arrangement if financial problems arise If some debts remain after loan funds are distributed, repayment may be difficult to afford.
Bankruptcy is a last resort because it represents a way to handle debts that cannot be repaid. When people apply to the court to be made bankrupt, their assets are sold or used to help repay debts. Creditors are informed of the bankruptcy and make claims for the amount they are owed.
Anyone can apply for bankruptcy including sole traders, partnership members, and individuals Payments to creditors covered by the bankruptcy cease After a period of typically 12 months, covered debts are discharged.
Not all UK courts handle bankruptcy cases Creditors can petition for bankruptcy of individuals who owe them £750 or more Financial interest in the home, assets of value, credit cards, and bank cards must be turned over to the bankruptcy trustee Assets are not returned following bankruptcy Financial affairs are investigated For up to three years, spare income can be used to repay bankruptcy debts Debts not listed within the bankruptcy order must be repaid (student loans, court fines, etc.)
If a business, operations usually close and employees are dismissed Bankruptcy violates some employment contracts (solicitors, charity trustee, etc.) Ability to obtain credit will be affected Bank accounts frozen and new ones may not be permitted Bankruptcies advertised in the Individual Insolvency Register and other official records.
As you can see, debt management plan pros and cons vary widely. Compare the positive and negative aspects of these and other programs and consult a debt management professional to learn more about each plan, qualification requirements, and any costs involved. An expert can suggest the best program and may also help establish it.