Debt Management Options

So you have large debts with various creditors which are causing you a lot of stress and aggravation. You are worried about losing your house or your TV being taken away. What are your debt management options?

Control and Reduce your spending

Your first option is to reduce your spending on luxuries eg nights-out, eating-out, etc and to create a monthly budget. It is not easy changing your habits which has caused your debt problems especially when you are losing so much of your monthly income just servicing the debts. This is where debt consolidation is used and in many cases it is successful, but only when there is control over spending. A debt consolidation loan brings together all your expensive debts into one cheaper loan, reducing your monthly cost servicing the debts and in some cases reducing the term of the debts. Debt consolidation loans, as I have mentioned, are only successful if you have control over your spending.

With budgeting and debt consolidation your credit score remains relatively good. However, if these measures are not having the desired effect on your debts and you are getting pressure from your creditors what options do you have? The options left are a debt management plan, an IVA or bankruptcy all of which will have a major impact on your credit score.

Debt Solutions

A debt management plan is an informal arrangement with your creditors to repay your debts at a reduced rate. It is unlikely that you'll get any debt forgiveness with a debt management plan or that the interest will be frozen. This means that it is difficult to fix a term which the debts will be all cleared. Because debt management plans are informal, the creditor can change their mind at anytime and demand the outstanding amount in full. This is why debt management plans should only be seen as a temporary arrangement and a way of giving you time to organize your finances. Anyone considering taking out a debt management plan longer than 5 years should also consider bankruptcy or an IVA.

An IVA is a formalized debt management programme usually lasting 5 years. With an IVA there is debt forgiveness and protection from any of creditors taking out bankruptcy proceedings against you. At the end of the IVA all your debts will be cleared and you can start rebuilding your credit score. IVA's are used in many cases to protect an asset like a house from being repossessed. If you don't have any assets to protect then you should consider bankruptcy. If you meet the criteria your debts could be written off after a year.

Any debt solution, to be successful, requires a change in mindset and lifestyle. The mindset change means looking to save money where you can: shopping about for the best buys and not buying things which you can't afford. The lifestyle changes may entail only going on holiday once a year, holding on to the car for another three years and reducing the number of nights-out. This may seem draconian but with the credit crunch worsening and global financial uncertainty many who don't change their financial excesses will end up losing everything.