Consolidating & Managing Debt

Debt consolidation is a common process taken when people find themselves in too much debt to cope. Consolidating debt refers to the process of taking out a single loan it order to pay off all existing debts. In order to make debt consolidation worthwhile, it is necessary to get a consolidation loan on good terms - with lower interest rates. Taking out a loan secured against a house to consolidate other debt is a risky path.

Debt consolidation and your creditors

Consolidating debt means sorting out a personal budget and making arrangements with creditors to repay the money that you owe. An informal debt agreement isn't legally binding, so creditors could ignore it at a later date and ask for it to be repaid in full. Make sure you get all terms in writing.

Debt management companies

Debt management companies offer to help out people in debt, although they will usually only deal with non-priority debts. DMCs negotiate with creditors on behalf of the debtor, with the aim of reducing the level of payment owed in total. The debtor then makes a single payment to the DMC who distribute this money to the creditors.

DMCs make their money in two ways. The first is to be paid a fee by the creditors, the second is to charge the debtor a fee. If you are already in debt, this fee may not be the best idea.

Free debt management

A number of advice agencies will help with free debt management plans and may even negotiate on your behalf. This type of free help and advice can be very useful for those in debt.

Individual Voluntary Arrangement (IVAs)

Taking out an IVA is one route for people in debt to take if they cannot work out an informal arrangement with their creditors and cannot repay the money owed. An IVA is a formal agreement to pay part, or all, of the debt owed over a set period of time. In order to get an IVA, the debtor must apply to the court and contact an insolvency practitioner to set up the agreement. 75 per cent of creditors must agree to it in order for it to go ahead.

IVAs are not an instant stop-gap solution, as they can take several months to organise and initiate, and the person entering an IVA may have to pay a large administration fee.

Administration orders

An administration order occurs when a creditor goes to the court and gets a court judgements against the debtor. The county court passes an order calling for regular payments to the court, which are then passed on to creditors. Administation orders are only used in cases when the debtor has a regular income and owes less than £5,000.