With levels of unsecured debt currently standing at a colossal 0.7 trillion, it isn't surprising that personal debt problems are at an all-time high. Credit card debt, personal loans and bank overdrafts are a source of great concern for many working families.
Whilst those with high personal debt often turn to secured debt consolidation loans, this isn't always the best option. Debt consolidation loans can actually be a further source of high APR debt should someone have bad credit. Is a debt solution, such as a debt management plan or Individual Voluntary Arrangement, a better option for those struggling with financial difficulties?
Resolving Financial Difficulties with a Debt Management Plan
A debt management plan is a voluntary agreement between a debtor and his creditors. It involves making a payment of at least £100 to an intermediary who, in turn, disseminates the proceeds to creditors on a pro rata basis. A debtor normally requires a minimum of three creditors.
Although a debt management plan doesn't write off debt, it can result in interest and further charges being frozen. It also normally means that creditor harassment comes to an end as an appointed account manager will deal directly with creditors to earn their fee for administrating the debt management plan.
The main negative with debt management plans is that, unlike an Individual Voluntary Arrangement, there is no debt write off. This means that, because of the reduced monthly payment, it can take a long time to pay off personal debt.
Resolving Financial Difficulties with an Individual Voluntary Arrangement
Unlike a debt management plan, an Individual Voluntary Arrangement is a legally binding agreement with creditors. Once 75% of creditors, in terms of value, agree to an IVA, there can be no further creditor harassment. This is provided that monthly repayments are maintained and the agreement doesn't fall greater than two months behind.
The debtor will need to make 60 monthly payments to an Insolvency Practitioner. Once this has been done the remaining unsecured personal debt is written off. The debtor will normally need to be in full time work and have the financial capacity to afford a monthly payment of at least £250. Someone wishing to proceed with an Individual Voluntary Arrangement will also need personal debts of upwards of £15,000.
The principle advantages of an IVA are that, unlike bankruptcy, it allows a debtor to keep their own home and doesn't result in an insolvency being made public. It also shouldn't result in someone's professional status being adversely affected. It is possible that an Individual Voluntary Arrangement can lead to up to 75% of personal debt being written off.
Should someone default on an Individual Voluntary Arrangement, the proceeds that have been paid into the IVA will be used to cover the cost of declaring the debtor bankrupt. Whilst an Individual Voluntary Arrangement does provide a way to write off personal debt, making repayments for 60 months is a long time and a lot can happen.
The majority of people struggling with financial difficulties and high levels of personal debt will be better off pursuing a debt solution, such as a debt management plan or Individual Voluntary Arrangement. It is, however, important to seek debt counselling before deciding which debt solution should be selected.
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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