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If you are like 70% of all Britons, at some point in your life you will hear this term, debt management. You also may hear terms such as IVA, DMP, and bankruptcy. But what is debt management, debt management plans, and things such as IVA, DMP????
Jon at debt management company said that he has seen an increase in the number of people looking into debt management plans and IVA’s mostly due to being made redundant and also the increased cost of living. As the cost of petrol and food and heating one’s home has increased, people have less money to service the debts they have, it is at this point they seek advice as to what they can do.
We all know, or most of us know of bankruptcy. When you are insolvent, meaning your liabilities exceed your assets, which basically means you cannot afford to pay your bills and debts, you can go bankrupt.
But what if you want to avoid bankruptcy, for whatever reason. Maybe you have a property that you don’t want to lose and would lose if you were to go bankrupt, or maybe you feel a moral need to try and pay back your debts. What can you do??
Debt management, that’s what you can do.
Debt management is basically a term used to manage one’s debts in a manner that you can afford, not what your creditors or banks are telling you to do, but in a way you can afford to repay them.
For example let’s say you have a few credit cards, an overdraft, and a personal loan all of which total about £15,000. The accounts are in just your name, you own a property, and have been paying all your bills just fine. Then one day your line supervisor advises everyone at your job that business is slow and work hours are going to be reduced. You suddenly are earning less money and now cannot afford to pay all the minimum payments on your loans and credit cards. You struggle and start to fall into arrears. the banks are phoning you or worse yet, collection agencies are ringing and asking for money, money you just don’t have.
What can you do?
Get advice on various debt management options that are available and you qualify for.
So what are the options for our imaginary friend with 15K of debt, a property, and not enough money to pay what the banks and collection agencies are asking for?
What our friend can do will depend on a few factors, one is the amount of debt they have, which we know is £15,000. The next factor is how much can they afford to pay, not how much the banks and collection agencies want them to pay, and lastly, is there any equity in their property??
How it is figured out as to what our friend can afford to pay is done by a detailed income and expenditure form, which is competed by the assistance of a profession adviser. Our friend could do this himself, but not being a pro at this and it not being their usually job, it is best to seek profession advice.
In this income and expenditure form, our friend’s wages are listed and any other income they may be receiving, tax credits, etc. The form also shows all their outgoings and bills, things such as their mortgage payment, council tax, electricity and gas, and other fixed monthly expenses. Then an amount is allowed for food, petrol, insurances, and any other monthly expenses our friend may be experiencing. This I&E does not include any of their debts or accounts, credit cards and the such.
Then what our friend has a surplus, after their living expenses, is what is used to determine what will be paid to the creditors, and it will also dictate what form of debt management will be best for them.
The adviser will also look at our friend’s property, not physically go and view it, but ask if there is any equity in the property. This also will help determine what form of debt management is best suited for our indentured friend.
If they only have a small amount of surplus, say £150, then bankruptcy or a debt management plan/DMP are options. However if the property has equity in it, then bankruptcy may not be a good option as our friend could lose his house if they were to go bankrupt.
If there is no equity, and our friend has no real surplus, then bankruptcy is an option, although they could still consider a debt management plan.
If our friend has more then £150 as a surplus of income, an IVA or individual voluntary arrangement is an option. An IVA would allow our friend to repay the debts in a manner they can afford, and also preserve the property, but if there is equity, in an IVA a portion of any equity is to be released at the end of the IVA.
Basically here is how both forms of debt management work:
Debt Management Plan/DMP:
*offers flexibility in the monthly payment, you pay what you can afford
*works for people who have a large amount of equity in a property, more equity than their actual unsecured debt
*no minimum amount of debt is required
*not a formally binding agreement, creditors do not have to accept the proposal, they will take the payments you make, but can still chase you for more
* can be a good short-term option if you know your circumstances may change
*can be a stepping stone to later do an IVA
*no reduction in the balances on the accounts, you pay unto the account is paid in full
*creditors may not freeze the interest
Individual Voluntary Arrangements/IVA:
*Formally binding agreement with your creditors
*The accounts are frozen so no new interest or charges are accruing
*A way to preserve property as in bankruptcy you may lose the property
*Is a five (5) year term, at the end of the five years you are debt free
*Need a minimum of £15,000 of debt
*Creditors reduce the balances on the accounts, you pay back a pence on the pound percentage
*A formal arrangement with your creditors, they agree to accept the payments you can afford and you are not chased for any additional payments
So as you can see each form of debt management has positive aspects about it, and for those looking to avoid bankruptcy, some form of debt management hopefully will fit their set of circumstances.