The alternatives to a Debt Management Plan
A Debt Management Plan is one of the most commonly used debt solutions. But before going ahead, make sure you consider the alternatives available.
- Debt Consolidation
- IVA – Individual Voluntary Arrangement
- Bankruptcy and Debt Relief Order
- Administration Order
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Consolidation is the practise of paying off multiple smaller debts with a single loan. It is possible to consolidate multiple debts using either an unsecured loan from your bank or by taking a further mortgage or secured loan against your property.
After the credit crunch in 2008 it became difficult to consolidate debt by borrowing. However this situation has now started to ease. More and more debt consolidation options are becoming available particularly if you are a home owner.
IVA – Individual Voluntary Arrangement
An Individual Voluntary Arrangement (IVA) is a formal debt solution. You will normally have to make a monthly payment towards your debt for a period of 5 years. After that time any outstanding debt will be written off.
Generally speaking there are no upfront costs to start an IVA. Once the Arrangement is in place you are simply obliged to pay your agreed monthly payments.
If you are a home owner you will be able to keep control of your property. However you will have to agree to releasing equity for the benefit of your creditors if possible.
An IVA is only available in England, Wales and Northern Ireland. If you live in Scotland you should consider the solutions available to you locally.
Bankruptcy & Debt Relief Order
Bankruptcy is a way of dealing with unsecured debts that you simply cannot afford to repay. If you declare yourself bankrupt all of your unsecured debts will be taken away from you.
You will still have to make a monthly payment towards your debt if you can afford to do so. These payments will last for a maximum of 3 years. After this time any remaining unsecured debt is be written off. However if you are a homeowner your property may be at risk.
If you go bankrupt you will not have to make any further payments towards your debts if you have no surplus income. As such for many people bankruptcy may be actually the best way of dealing with their debt problem.
A Debt Relief Order is designed to help people with smaller debts who are one low incomes. Once the Order is in place your debts will be taken away from you and you do not have to make further payments towards them. After 12 months what you owe is written off and you are debt free.
**Update** You can only apply for a DRO if you fit some strict acceptance criteria. You can apply if your total unsecured debt is £20,000 or less (up from £15,000 on 1st Oct 15). The maximum you can afford to repay each month must be no more than £50. In addition you must be renting your property. If you are a home owner you cannot apply for a DRO.
An Administration Order is a way to deal with debt if you owe less than £5000. It is a formal legal debt solution. Once approved by the Court your creditors have to stick to it.
You are only eligible for an Administration Order if you already have a CCJ against you which you cannot pay. You also need to be able to make a payment towards your debts each month (paid to your local court). The court will divide this money between your creditors.
The use of Administration Orders has reduced in recent years. This is largely due to the introduction of Debt Relief Orders which are less onerous for people who owe smaller amounts of debt.
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