Strategies For Dealing With Debt

By: Nik J Jones


Debt snowballing - as much as possible is repaid on the debts with the highest interest, while making minimum payments on the remainder. This method of providing help with debt problems is often used on credit cards.

Debt consolidation - all debts are paid off using the advance for a new loan. This new loan is a second charge secured on a mortgaged property, and is typically arranged for 15 to 25 years. It was popular in the early 2000s as a way to manage debt repayments, but the availability of these loans was much reduced following the credit crunch of 2007. While debt consolidation often reduced the monthly payment, it could be expensive given the long loan term, and the snowballing method was often cheaper. Given that the new loan was secured on property, consolidation also put the borrower at risk of re-possession.

Shopping around for better deals - especially any free balance transfer offers.

Reducing other expenditure - this can make your debt repayments less of a burden. Shop around for the best prices: there are price comparison websites for a wide range of products, not just insurance and utility bills. Look out for special offers.

Debt management plans - a single, affordable monthly payment is made to a specialist debt management company, who then distribute this to creditors.

Debt relief orders (DROs) - designed for people with a relatively small amount of debt, but who are still experiencing significant difficulties. You must have no more than 15,000 in unsecured debts, must not be a homeowner, have no more than 300 in assets (apart from a car up to the value of 1000) and have less than 50/month surplus income after regular expenditure. Your creditors agree to freeze your debt for 12 months, and if your circumstances have not improved after this time, your debts can be written off.

Individual Voluntary Arrangements (IVAs) - here you need 15,000 of debt and at least three creditors. The minimum monthly repayment is 200. You can avoid repaying debt here, as the proportion you cannot afford to repay is written off, while your insolvency practitioner negotiates with your creditors as to the amount you can afford. An IVA must be approved by creditors who represent at least 75% of the debt. IVAs can help greatly in seeking to manage large debts, but if it fails, you may be forced into bankruptcy.

Bankruptcy - the most drastic step for managing debt problems. In order to be declared bankrupt, you must be insolvent i.e. unsecured debts exceed assets. Bankruptcies are usually discharged after 12 months, and all debts are written off. Bankruptcy has serious consequences - your credit rating is affected for a period of six years, and you could lose assets such as your home or car.

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Nik Jones is a professional Debt Advisor at Debt Local. For any type of debt advice or debt management help, call for free on 0800 044 5659.

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