Compare debt solutions: IVAs, debt management and debt consolidation
Different debt problems require different solutions. Someone who`s genuinely unable to repay what they owe is in a completely different situation to someone who just doesn`t want to spend time keeping track of multiple debts when they could replace them all with a single, larger debt.
Here`s a brief look at three of the most common debt solutions: IVAs (Individual Voluntary Arrangements), debt management plans and debt consolidation loans*.
IVAs (Individual Voluntary Arrangements)
An IVA is a formal, legally binding agreement with your unsecured lenders. Basically, you`d commit to repaying as much of your debt as you can over an agreed time (in most cases this would mean you`d make monthly payments for five years), and they`d agree not to pursue / start any legal action against you while the IVA is in progress, and to write off any outstanding debt at the end of the IVA.
Who might enter an IVA?
An IVA would only be right for someone who can`t repay their unsecured debts in a reasonable period of time - but can commit to the repayments which the IVA would require.
Bear in mind that...
It`s a form of insolvency and will have a serious effect on the individual`s credit rating for six years from the time it starts. If they own their own home, they`ll probably have to release equity from their property too, so they can pay more into the IVA.
Debt management plans
A debt management plan is an informal agreement with your unsecured lenders. If you can`t keep up with the repayments you agreed to make when you took on your debts, your lenders may agree to accept lower monthly payments - for longer. They may also agree to freeze/reduce interest and charges. While they`re not obliged to agree to any changes to your repayment agreement, they`re likely to do so if they can see that this is the best way for you to repay your debt.
Who might enter a debt management plan?
Debt management can be the right solution for people who can`t keep up with their monthly payments, but who can repay what they owe in a reasonable period of time.
Bear in mind that...
Repaying any debt more slowly can mean it costs more in total, thanks to interest charges. Plus, defaulting on (failing to keep up with) your original repayment agreements will damage your credit rating - whether or not you enter a debt management plan.
Debt consolidation loans
A debt consolidation loan is simply a new loan that you can take out to repay your other debts all in one go. This can make it a lot easier to stay on top of your finances, since you`d have just one payment to budget for (and make) each month, rather than multiple payments - and it can give you a much better overview of your financial situation, since you`d be able to see exactly how much you still owed (rather than having to add up multiple debts). Some people also take the opportunity to reduce their monthly payments by arranging to repay the debt over a longer period of time than their original debts would have taken (although this can mean they end up paying more, since they`ll be paying interest for longer).
Who might take out a debt consolidation loan?
A debt consolidation loan may be suitable for someone who can afford payments to their debts but just wants to simplify their finances and/or reduce the amount they`re paying every month.
Bear in mind that...
Debt consolidation doesn`t reduce the actual amount of debt - just the number of debts. As with any kind of loan, no-one should take out a debt consolidation loan unless they`re confident that they can repay it.
* Note that this page isn`t intended to provide an in-depth comparison of these solutions. Before you commit yourself to any debt solution, it`s essential to talk to a debt adviser who can explain how they work and recommend the approach which is most appropriate for you.
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