Debt Consolidation - The Options You Have - By: James Copper

With consumer borrowing at an all time high the nation is riddled with debt. This coupled with the sharp hike in interest rates has meant that many people are struggling to keep up with their monthly payments. If you are in debt then you are not alone.

You have a number of options to become debt free and financially stable again. You need to consider each of these options carefully and make sure you choose the best one to fit your circumstances. Below is a brief overview of the options you have available, remember to always seek expert advice before making a decision.

Debt Management Plans

A debt management plan is an informal arrangement between a lender and a customer to repay debts at a lower repayment level than contracted for, which is usually around three percent per month of the outstanding balance. Generally debt management plans can be considered in the following circumstances:

# Debts are less than 20,000.
# There is a monthly surplus of at least 200 - 250 to offer creditors.
# If you can pay 1 percent or more of the outstanding debt per month.
# If you are a homeowner and there is insufficient equity in the property.
# If smaller debts can be cleared within a couple of months.
# If debts may be cleared in less than 60 months.
# If the debtor is a tenant.
# If debts are normally affordable but arrears have occurred.

Individual Voluntary Arrangement (IVA)

An Individual Voluntary Arrangement or IVA is an alternative to bankruptcy, it is an offer by an you to your unsecured creditors in order to settle debts. The minimum payment (called a dividend) that the creditors will agree to is twenty five pence in the pound.

The process involves preparing a statement of affairs and referring the case to an Insolvency Practitioner (IP), who is usually a Chartered Accountant who specialises in insolvency. The IP puts together a proposal for the creditors, in order for the IVA to be accepted, seventy five percent in value of the creditors must vote to accept the IVA.

Generally the IVA involves a monthly payment from your surplus income for a five year period. It could also include capital raised from your assets such as the introduction of equity from your property.

Usually the IP will charge fees as a lump sum (between 2000 to 3000) up front, some take their fees from the monthly contributions. There are also other fees involved.

You can use the following checklist as a rule of thumb to establish whether an IVA might be the best solution for you:

# Debts are more than 20,000.
# There are more than 5 creditors.
# The minimum dividend to creditors is twenty five pence in the pound
# Debtor has no assets (eg is a tenant).
# Debt has sufficient income to pay 225 to 250 per month.
# Debts will take longer than 60 months to clear in the normal way.

Banks and other lenders have become more and more frustrated with IVAs. This is because they have become more prevalent in society, which means they are writing of more debts. Some people use an IVA as the easy way out, when previously they would have found a way to pay of the debts in the normal fashion or agree on a deal with the lender.

Remortgage

If you are a homeowner then in some cases a remortgage might be your best option. People generally do get a little nervous about using the equity in their house to pay of their debts.

If you have a number of unsecured debts and your creditors are aware that there is equity in the house they may apply for a County Court Judgement (CCJ). If a judgement is obtained it is available to the creditor to seek further enforcement action which may include placing a charge on the debtors home.

A remortgage is basically changing the lender and/or deal that you are currently on for a new one. At the remortgage stage you can also dip into the equity you have and use it to clear off your outstanding debts.

A remortgage can be a very good option, if you think of the rates you are paying to credit card companies, lenders, etc then clearing them and just having one lower monthly payment is an attractive proposition.

Secured Loan

A secured loan is basically a second charge on your property behind that of your main mortgage. A secured loan is a loan that is paid out to you based on the equity available in your home. You will pay the secured loan off over a period of between 5 to 30 years at a monthly payment that is deemed affordable to your circumstances.

If you have equity available in your property then a secured loan can provide a great solution to clearing your debts. With a remortgage there are a number of expensive fees involved not to mention the possibility of an early repayment penalty from your current mortgage lender. A secured loan does not carry such burdens. Also with a secured loan generally you will not have a hefty early repayment charge.

The rates on secured loans will be much more reasonable than the unsecured debts that you have. The secured loan lender will require you to produce a breakdown of your outstanding debts and monthly payments and make sure that the loan will be affordable, but other than that, obtaining a secured loan is a reasonably straight forward process.

So as you can see there are a number of options available to you. Each one has its advantages and disadvantages, all of which need to be assessed on an individual basis. Now you are armed with a basic understanding you can easily go and speak to companies and experts about your situation and work to resolve your debts.

About the Author

James Copper enjoys writing on all areas of personal finance and debt consolidation. He works for Any Loans who source Secured Loans for people with credit problems.

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