If you are struggling with debt you may decide its time to consolidate. The trouble is debt consolidation takes many forms and finding the right form of consolidation can be tricky. This post is designed to act as a kind of introduction to the world of debt consolidation and how it can best help you become get free. This guide is by no means exhaustive, those guides will come later.
I will assume for the purpose of this post you have already worked out what you owe. There are three options available to you which I will discuss in more detail below. The first form of debt consolidation is what I call the ‘informal’ approach. By informal I mean without the assistance of the government (that will be discussed in more detail below) and possibly without any other third parties.
Informal Debt Consolidation part one: The loan (secured and unsecured or re-mortgage
If you are a homeowner and have equity in your property you may wish to consider re-mortgaging your property to pay of your debt. Prior to the Credit Crunch this was an immensely popular form of consolidation especially as re-mortgages could be organised either for those homeowners with a poor credit history. Since the Credit Crunch has had such a crippling effect on the economy this form of consolidation is more applicable to those with a good credit history. You could also look at the possibility of taking out a secured loan against your property to pay off your debts. I am not a huge fan of secured loans. Typically, you would be better off re-mortgaging as the interest is far lower and you may actually reduce your monthly payments as the length of your mortgage will have been extended.
If you are considering re-mortgaging bare the following points in mind:
· Do not go with the first company you speak to or even your existing lender initially. Shop about and see who gives you the best offer.
· Make sure you fully understand the fees you are going to be charged. Always read the small print and ask if you are unsure.
· Be aware that if you re-mortgage you are going to extend the amount of time you are paying back your mortgage. Factor that in to any future plans you have such as retirement and the like.
· If you decide to get a secured loan make sure you have factored in the repayments to your monthly outgoings. Failure to keep up with them may result in your property being repossessed.
Debt Management plans are a massively popular way of consolidating debt, the key is to find the right company. Please refer to this post for more details regarding this matter. Debt management plans work by you paying your monthly disposable income to your debt management company who will then forward a payment onto your creditors minus their fee. The idea is that all creditors will receive a fair payment all you need do is pay each month. I cannot stress enough how important it is to remain in regular contact with your debt management company regarding your finances. Do not assume that because you are with a debt management company they will be constantly fighting your corner. Make sure you reads your monthly statements and query if payment arrangements are being out in place and interest and charges are been frozen or reduced.
Debt management companies are not really regulated in a robust fashion. Hopefully, this is going to be addressed soon however as I have mentioned before some debt management companies are awful (I have worked for them) and will take your money and do little else. If you are planning in entering into a debt management plan see it as a two way relationship. You should work together to get rid of your debts, a debt management company will do the bulk of the work but you must also help yourself in the process. Many people judge a debt management company by how much they pay in total each month. Think of it this way, the less you pay the longer it will take your debts to be paid back and the longer you will be on a debt management plan for.
Here are a few important tips to think about if you are going to attempt a debt management plan:
· Could you do it yourself? True some debt management companies do know what they are doing. However, if you are disciplined and strong willed you maybe able to do the hard work yourself.
· How long are you going to be on your debt management plan? Anything over four years (without factoring in additional interest and charges) maybe too long and you may wish to consider alternative arrangements.
· How much is your monthly management fee? Anything over 17.5% of your total monthly payment is too much.
· Shop around. Check out iva.co.uk and iva.com. Look at other forums to see what people say about the company you are thinking of going with.
· Don’t assume that because you are on a debt management company everything will fine. Make sure they are doing their job call them, badger them if you feel you are not getting good service.
· Don’t for heaven sake take out anymore debt. It will not end well.
The next form of debt consolidation is what I call the formal route. You could argue that a re-mortgage is formal, however these are just my definitions, so there! By formal I mean debt consolidation arrangements that are legally binding. The most common of these is Individual Voluntary Arrangements.
There are two forms of IVA’s. The first and most typical is an arrangement lasts for five years and involves you making a monthly payment (much like a debt management plan) after which any remaining debts are written off. The amount that is actually written off depends on your circumstances. Don’t be fooled by the advertising that will tell you wipe of X amount of debt. Please see this post and this post for more details. If your IVA proposal is accepted you are protected any further action by ALL of your creditors as well as all interests and charges are frozen. IVA’s will have an effect on your ability to take out further credit for a period of about five years after your IVA has finished.
The second form of IVA’s are called ‘one day IVA’s’. These IVA’s are for those who are able to pay a lump sum of cash into the arrangement from the beginning (normally done via a re-mortgage) and upon payment your creditors you are free to move on. You will still find it hard to take out further credit for five years and the amount of debt that is written off depends on your circumstances and how much you are going to pay in.
IVA’s have a success rate of about 60%. There are various reasons why IVA’s fail ranging from people simply not paying them to people losing their jobs. Here are a few tips to bare in mind when considering an IVA:
· Don’t go with the first company you come across. Look at this post and this post. Shop around and do read this post!
· You cannot include any secured debts, so no mortgages, secured loans car HP’s. You will also be unable to include your student loan, you must continue to pay this.
· Do you have a partner? If you do make sure they are aware of what you are doing, if you have any joint debts they will still be pursued for them so make sure they are aware of this.
· Always ask if you are unsure about anything. Don’t carry if you unsure about anything.
The other from of formal debt consolidation is bankruptcy. I often post on Yahoo answers with peoples queries regarding debt and I am often amazed by what people perceive bankruptcy to be. Many people think they are going to go to prison or they will lose all their possessions. The truth is all bankruptcy is an effective method of clearing debt if the circumstances are correct. Sometimes people are left with no other choice than to declare bankruptcy, others choose bankruptcy over other forms of debt consolidation because they decide that is the best option for them. One of the accusations debt management companies have levelled at them is that they should have told individuals with no assets to go bankrupt because it would have been better for them to declare bankruptcy. Garbage. I dealt with many people who wanted to payback something to their creditors because they felt like it was the right thing to do, and good on them for doing so.
If you decide to declare bankruptcy it is your decision. Do not listen to anyone who says it is easy and who claims to know how will it effect you. Speak to your Official Receiver who will help you through your bankruptcy, they will know how your case will effect you and will be able to help you with any questions you may have. Here are some tips to bare in mind:
· Do not under any circumstance pay for the services of a third party to assist you prepare for bankruptcy. These companies are rip off merchants of the highest order and will charge you up to three times more than your bankruptcy will cost you.
· Bankruptcy does cost. You must pay an initial fee of £450 and may have to make monthly contributions to your official receiver for a time period they see fit.
· Do exactly what your Official Receiver tells you. If you try to deceive them or cheat the system you may end up in a lot of trouble including a prison sentence.
· Your name will be placed in the local paper. Don’t be scared by this. Who ever reads the bankruptcy section anyway.
This post is just an introduction to these debt solutions. For anymore help post a question or check out:
www.ausdebtsolutions.net
www.ausdebtadvice.net
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