More consumers than ever are desperately seeking a way to escape their debt burden in the UK. PriceWaterhouseCoopers (PWC) stated that there were 120,000 personal insolvencies during 2009 due to serious debt problems. A UK debt solution, such as a debt management plan, debt relief order and Individual Voluntary Arrangement (IVA), could provide a viable alternative to bankruptcy.
Why Are Debt Free Solutions Necessary?
A report by the Bank of England revealed that the amount of credit card debt written off by the banks rose from £812m to £1.6bn in the third quarter of 2009. This doesn't mean that the consumer is forgiven the money they owe, it is just sold on for as little as 10p in the £1 to collection agencies. The remainder is written off against taxes and the agency then pursues the debtor for the full amount. A debt relief program helps struggling consumers to reach an amicable agreement with creditors to pay off debt.
Paying Off Debt with a UK Debt Solution
The objective of a debt relief program is to make the repayment schedule more affordable, reduce the amount of money owed, pay off debt more quickly and/or prevent further creditor contact. Whilst some consumer debt relief programs are voluntary in nature, others are legally binding upon creditors. A bankruptcy alternative will have negative ramifications for the individual's credit rating and this will make borrowing money more difficult for up to 6 years.
The Individual Voluntary Arrangement (IVA)
The IVA is the main bankruptcy alternative and involves paying off debt over 5 years. It must be approved by at least 75% of creditors (in terms of value) at a meeting of creditors. It is a legally binding agreement with creditors to pay back a reduced percentage of the total amount owed. Further interest and charges will be frozen. An Individual Voluntary Arrangement involves a homeowner remortgaging at the end of year 4 in order to contribute some extra money to the agreement. Once the final payment has been made, the Insolvency Practitioner will issue a certificate of completion.
Pay Off Debt with a Debt Management Plan
The objective of this debt free solution is to achieve affordability. After a budgetary analysis has been performed, an affordable monthly repayment will be determined. The client will then make a single repayment to an intermediary and they will disseminate the proceeds to creditors on a pro rata basis. Whilst interest and charges may be frozen, the creditor isn't under any legal obligation to do so. A debt management plan is a purely voluntary agreement between the borrower and his/her creditors.
Debt Relief Order
This is a debt relief program for individuals who owe less than £15,000, have assets of less than £300 and a monthly disposable income of less than £50. It is a form of fast track bankruptcy that allows an individual to be free of debt in just 12 months. The cost of a debt relief order is just £100.
Is a Debt Free Solution the Right Option?
It is important to appreciate that UK debt solutions all involve the borrower defaulting on their credit agreement. This will cause bad credit and make it more difficult to get a loan, credit card or mortgage in the future. However, it can help to alleviate the pressure caused by unmanageable debt. It is important to seek credit counseling to ensure that the right debt free solution is selected from the outset.
Sources
"Debt statistics - February 2010." Credit Action.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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