Many consumers have learnt their lesson the hard way – in this day and age, being extravagant and spending money you don’t have is foolish. However, despite our sensible reluctance to spend on unnecessary luxuries, those small, unaccounted for purchases can significantly add to our existing debt. Thus we can end up struggling to pay off our debts while the interest rate piles up. This results in significant financial problems.

If you find yourself struggling with debt, and with few prospects of getting it cleared, you need financial assistance right away. This is a vulnerable time for you as you are more likely to accept any offer available to you. Caution is advised here as quick fix solutions often end up creating far bigger debt problems. Many people suffering from debt find themselves confused by their options.

There are a few debt solutions out there that can help relieve debt in a manageable way. In order to make an informed decision about which debt solution is best for you, you need to know as much as your can about the options available.

Here we look at the differences between Debt Management and an IVA – both possible debt solutions with different advantages and disadvantages.

Debt management

Debt management is a possible way to eliminate your debt. A debt management plan is an effective solution to paying off your debt under the best terms possible. You will make one monthly payment which will be distributed amongst your creditors. You will then make consistent, timely payments and in return you can enjoy reduced interest rates. The single payment helps reduce confusion and allow for a more efficient financial process provided you honour your monthly commitments.

Debt management, however, does not reduce how much you owe, but instead offers reduced interest rates, helping you pay off your debt faster. Some creditors may state in your credit file that you are participating in a credit counselling programme, but it ultimately will not affect your credit score. Also, you will no longer have to be in constant contact with your creditors in order for debt elimination to take place.

Debt management considerations:

• All your debts will be repaid over time
• Your creditors may not agree to a change in the applicable rate of interest
• Creditors will still be able to demand quick repayment of the debt. They can still take legal action against you.

Individual Voluntary Arrangement (IVA)

An IVA is a more serious debt solution. With an IVA, your Insolvency Practitioner (IP) will negotiate with your lenders in the hope that they will accept less than what you actually owe. But while this is advantageous to the debtor, your credit score will be affected in a negative way. Also, your IVA will reflect on your credit score for 1-6 years.

As opposed to a debt management programme, this debt solution is a formal arrangement. It is a legally binding agreement between the debtor and the creditors.

IVA considerations:

• Because this is a formal agreement, the debtor will be bound by its terms. Failure to comply with these terms could result in the debtor filing for bankruptcy.
• The terms of the agreement can be quite strict and rigid, so the debtor has to fully understand these terms before accepting it.
• The debtor will not be allowed to take out any other credit agreements once committed
• It will be noted on your credit record. However, after five years, you will be able to improve your credit rating score once again.

The decision you make will affect your financial future, so best speak to a financial expert, allowing you to make an informed decision.

For many, an IVA is the best alternative to bankruptcy and clearing their debt. But IVAs can be complex. You need to know exactly what you are getting yourself into before taking the step towards applying for an IVA. Here we provide you with the ten most important facts you need to know about IVAs. It is, however, important that you speak to a financial expert before making this decision.

Top 10 IVA facts:

1. You can repay your debt with fixed, affordable payments in a maximum of five years.

2. An IVA is ideal for those wanting to settle unsecured debts in the form of credit cards, store cards, unsecured loans, overdrafts etc. It will also assist in your secured debts in that you only pay what you can afford.

3. Once your IVA is approved and your term has begun, your creditors will no longer be able to contact you making payment demands. You pay a fixed monthly payment instead of multiple payments to various creditors. What’s more, it will cost less and save you money. This is because your payments are based on your disposable income – i.e. the money you are left with after all your essential expenses (mortgage/rent, secured loans, utility bills, food, petrol etc) are taken care of.

4. The chance of you losing your home is slim through an IVA. Although, you will be expected to release some of the equity from your property to pay into your IVA.

5. Once the IVA term has been successfully completed, any outstanding unsecured debt will be written off. After a duration of five years paying a fixed monthly fee, any remaining debt will fall away.

6. Unlike bankruptcy, an IVA is a private process and will not appear in the local papers. It will, however, appear in the Insolvency Register, which is publicly available.

7. An IVA will be approved if the IVA proposal is accepted by enough of your creditors. Once accepted, all creditors, including those who have rejected your proposal, will be bound by the terms of the contract.

8. Unlike bankruptcy, an IVA does not place any restrictions on your future or current career.

9. You do not need to own a home to qualify for an IVA.

10. An IVA is an option to seriously consider if you:

• Are struggling to repay your debts
• Have two or more creditors
• Have debt of at least £15 000
• Have a full-time job
• Are able to commit to making regular, monthly payments throughout the term of the IVA without defaulting.

The first step towards freedom from debt and avoiding severe debt solutions like personal insolvency is facing up to the problem. Next, you’ll need to look carefully at your budget and cut out unnecessary spending. This will let you pay more money towards your debt repayment. After you’ve tightened up your budget and have an idea of what you owe and what you can afford to pay, seek out professional debt advice. Debtsolver can help you to find the right debt solution to suit your circumstances and if necessary, assign you a licensed insolvency practitioner.

A licensed insolvency practitioner (IP) is the only person who is qualified to act in relation to insolvent individuals, partnerships or companies. They’re also obliged to have professional indemnity insurance in addition to case-specific coverage. The Institute of Chartered Accountants are just one of the regulatory bodies who oversee the conduct of IPs. Like going to the doctor, there really is no case that they won’t have come across before so there is absolutely no need to be embarrassed. Don’t put it off and don’t hold anything back. With swift action and full disclosure, the insolvency practitioner will be able to help you find a reasonable, manageable solution to your debt problem.

Make a detailed account of your financial situation, including a complete breakdown of your incomings and outgoings, assets and liabilities. This is integral in helping the insolvency practitioner to guide you through your options. Each will have benefits and drawbacks that you’ll need to discuss in order to come to a decision on which will be best for you. If you have a limited income and no assets, it’ll probably be bankruptcy.

The right debt solution for you will depend on your financial circumstances. If you are looking to avoid bankruptcy, an insolvency practitioner might suggest an Individual Voluntary Arrangement. This is a legally binding arrangement with your creditors, which is brokered by an insolvency practitioner. A proposal based on your debt and ability to make payments is put to your creditors and if they agree to it, your IP will oversee repayment of your debt, so you won’t have to deal with your creditors any more.

IVAs have their benefits for all parties. Your creditors will tend to be repaid a greater proportion of the outstanding debt that they would have been if you had filed for bankruptcy. If you are a homeowner, the chances are that your property will be safe, although you may have to relinquish some of the equity towards repayment.

Of course, as everyone’s situation is different, you could find that an IVA isn’t right for you. For some people, filing for bankruptcy can be a more favourable solution to their debt problem. This will involve filing a petition at your local county court. The bankruptcy term usually lasts for a year but again, depending on your financial circumstances, this can fluctuate. When you have successfully completed the process and are discharged from the bankruptcy, you’ll be free from debt and ready for a fresh start.

You’ll be assigned a trustee by the court and they’ll deal with your creditors on your behalf. This includes dealing with your assets. More often than not, your main asset will be your home. Bankruptcy will not necessarily mean you lose your home; it depends on the value, the mortgage and your financial circumstances.

The Debt Relief Order is intended for those facing debt problems without many significant assets. That is, for those who don’t own their home or have the material resources to supplement their earnings. In order to qualify for a Debt Relief Order, an individual must have a total combined debt amounting to less than £15,000. For those that match these criteria, the DRO could be an ideal solution; potentially freeing you from debt within a year and allowing you to avoid the more severe debt solutions on the market, like IVAs and bankruptcy.

The extent of your debt problem is not dependent on the amount that you owe. It’s a question of your ability to service the debt and maintain the repayments. The Debt Relief Order, as we’ve said, is pitched at those who aren’t homeowners. However, it’s also a debt solution that could provide the most manageable route out of debt for anyone who finds that they have under £50 left after paying their monthly bills. Your debts, which must amount to less than £15,000, can include any unsecured loans, credit card debt and your overdraft facility. Excluding you car, which can be worth up to £1000 but including your pension, your assets can’t be worth more than £300 in total.

The DRO term is usually a year and in that time your creditors will not be able to chase you for any payment or take any further legal action against you. However, you’re going to find it very difficult to obtain any credit. Considering your situation, this may be a good thing but if you do apply for any credit of over £500, you are legally bound to inform them of your DRO. It remains on your credit report for 6 years after successful completion of the terms.

Debt Relief Orders must be granted by the Official Receiver and if you come into some money while you’re under the terms of the DRO, you are obliged to let them know. If you break this or any other rules of your DRO, the Official Receiver will implement a Debt Relief Restriction Order, extending the restriction period to 15 years.

A Debt Relief Order can only be issued to individuals in debt who have been referred by an authority that is recognised and approved by the Insolvency Service. Debtsolver will be able to give you more information about the organisations that are authorised to make Debt Relief Order referrals; there are six of them. Providing it’s the right debt solution for you, your dedicated debt advisor will take you through all stages of the process and help you to complete the necessary paperwork for the Official Receiver. This is after you have talked to them about your situation and come to a decision on which solution is best for someone in your financial circumstances.

Should you find yourself facing severe debt problems, it’s possible that a creditor could file a county court claim against you. In essence, this signifies their intention to take you to court in order to get the money that they’re owed. It’s then the court’s job to examine the case and decide whether or not there is actually a debt to be paid, the value of the debt and then order you to pay it back in line with the instructions that they’ll give you. This isn’t a criminal matter, so even though you go to court, it’s not a case of guilty or not guilty. In fact, you don’t even have to appear in person. They’ll need you to provide them with information about your finances, as will be outlined in the county court claim form that you’ll be sent, advising you of the action being taken against you. This is where you’ll put your own side of the argument forward too.

Although at lot of what happens next will be down to the court, you still have options about how you would like to go forward with the repayment of the outstanding debt. It’s not too late to just pay it off. You can send payment directly to your creditor within 14 days of receiving the order. The court fees and extra interest will be added to the sum due for repayment but if you settle this, that’s the end of it.

In the majority of cases, this situation has arisen because of your inability to settle the outstanding debt. Should this be the case for you, you’ll need to fill in an admission form and make a proposal of how you actually intend to pay the debt off. So, if you get assistance from an impartial advisor in drawing up a repayment plan based on instalments, you’ll need to present this to your creditor for approval within the same 14 day period. Of course, if you dispute the amount that you owe, there are more forms to be filled in, where you can explain the situation, outline the amount that you feel you owe and how you intend to repay it.

If the need arises to defend yourself in court, you have 14 days to put together your case against the allegations. There is a form for extending this for another 14 days if you’re unable to construct a suitable case in this time. Should you be considering a counterclaim, that is, suggesting that it’s actually the creditor that owes you money, there’s a section to fill in for that too.

Upon review of your case, the court will come to a decision. They’ll issue a County Court Judgement (CCJ) if they find in favour of your creditors. This will clearly outline the repayment details. Should you have several judgements against you, the court might issue an administration order, compelling you to make a regular repayment to be distributed among your creditors.

Get in touch with the court at the first sign of difficulty in meeting the repayment criteria. It’s possible that you will be able to come to an alternative arrangement. All county court judgements that aren’t settled within one month are recorded on a public register for six years. This will have a negative effect on your credit score and make it difficult to obtain credit.

Get help with this process from a dedicated financial advisor. Drop by www.debtsolver.co.uk for a free financial health check, along with impartial advice and assistance in finding a solution to your debt problem.