The six step guide to getting out of debt

For some, talking about their debt problems can be difficult and embarrassing. Many of my clients tell me they feel they have failed and have let themselves and their family down because of their debts.

At some time debt may affect us all. Those who find themselves financially overstretched may have had a trigger point in their lives, such as redundancy, illness or separation from a loved one that started the cycle of debt. It often seems that whilst those in debt may have a talent somewhere, it may not be in money management.

Whatever the reason for the problem, you need to understand what help is available if you are financially strapped. My biggest problem with the debt management industry has been that sometimes the debtor/borrower is only told of one option, the one that earns the fee for the firm contacted for help. However I am pleased to say that this is becoming less prevalent due to improved regulation.

I have detailed below the six options available to you when debt problems arise. Not all will apply, it depends on your level of debt, your assets and how much spare money you have after paying essential bills.

1.Do nothing

Stay as you are and ignore the creditors. This will guarantee your debt will increase and creditors will instigate Court proceedings to recover their money. This is often done through an attachment of earnings, where the Court orders a sum of money to be deducted from your pay every month until the debt is cleared. There could also be a County Court judgement, known as a CCJ, with the lender making an application for a charging order on your property, if owned, to secure the debt. Finally of course there is the creditor making you bankrupt.

2.Informal Arrangement

Here you contact the creditors and explain your circumstances requesting that they freeze interest and charges and you offer reduced payments. If you get nowhere or feel too stressed doing this then you could consider option 3.

3. Employ a Debt Management Company (DMC) to do the negotiating with the creditors for you

The firm will act as a go-between for someone who owes money (the debtor) and the lenders (creditors) to whom the debtor owes money. The DMC contacts the creditors on behalf of the debtor and draws up a contract between the debtor and his or her creditors. Once the contract is ready the debtor pays the DMC monthly payments and they in turn distribute payments to the creditors. There is a charge for this no matter what DMC you use. I explain more in my website

4.Debt consolidation

This is where you obtain a new loan either from the bank or through a secured loan on the house and pay off the debts. This can be useful if your new loan is at a far lower interest rate than the credit card rate you are currently paying. The downside is that you will be securing any debts on your house if you opt for a secured loan and you need to consider the period of repayment. Over many years this can make it an expensive way of repaying creditors but it may be appropriate for some individuals.

5.Individual Voluntary Arrangement (IVA)

Simply put, this is a contract between the debtor and their creditors whereby the debtor puts forward a proposal to his or her creditors outlining their current financial position and making them the best offer they can afford, either from current income or from a third party contribution in settlement of all their unsecured liabilities. Contributions are normally paid monthly, typically over a period of 3 to 5 years. However a one off lump sum payment can also be made without the need to make the monthly payments. When the IVA is accepted by creditors the arrangement is legally binding on both the debtor and the creditors and no further interest is added from the date the arrangement begins. Once the debtor has completed his or her part of the contract and providing the terms of the IVA are complied with then the creditors have no recourse over that debt and it is deemed to have been legally discharged.

6. Bankruptcy

65,000 individuals went bankrupt in 2007 and even more cases are predicted over the next few years. Irrespective of what your mate might say down the pub about it being easy and that they did not end up paying anything back, be warned. Every bankruptcy case is decided upon its merits and you will be assessed to see if you can make a payment under an Income Payments Agreement (IPA) for a period of 36 months from the date of your bankruptcy order. Your conduct prior to going bankrupt will also be scrutinised to see if you were culpable by taking on credit knowing you could not pay it back. The Official Receiver (OR) could make you subject to a Bankruptcy Restriction Order (BRO) and not release you from bankruptcy for a number of years. That said, bankruptcy is a lawful way of discharging your unsecured debts and it works for many individuals. In 2007, 35 Police Officers and Support Staff went bankrupt under my guidance and they all kept their employment.

All these options, except for No.4 where you pay creditors in full, will affect your credit rating. More information, about the pros and cons of debt management, IVAs, procedures and a comparison table for different solutions to debt problems can be found at

REMEMBER, it is not a crime to be in debt - always insist that you are treated with respect

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