Each debt solution has different implications depending on your circumstances. The information below will help you decide which is right for you.
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- Debt Management Plan (DMP)
- IVA (Individual Voluntary Arrangement)
- Bankruptcy and Debt Relief Order
- Administration Order
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Consolidation involves paying off your debts with one large loan. It can be achieved using a secured or unsecured loan or by releasing equity from a property by remortgaging.
You will normally only qualify for a consolidation loan if you have a good credit rating. If your credit rating is already poor it is unlikely that you will be able to borrow more and this option may not available to you.
Where you are thinking about using consolidation you must first make sure you can afford the new loan payments. If you are unable to consolidate everything you owe or the payments are more than you can afford you risk making your debt problem worse.
Debt Consolidation is the only debt solution which will not negatively affect your credit rating.
Debt Management Plan (DMP)
A Debt Management Plan (DMP) is an agreement to reduce your debt payments to an amount you can more easily afford.
The agreement is not legally binding. This provides various advantages for example you can stop and change to a different solution at any time. In addition if you are a home owner you do not have to involve your property.
However creditors do not automatically agree to write off debt for you. As a result a DMP is normally best if you can pay your debt in full within 5 years or just need a short breathing space from the payments.
Use our Debt Solution Comparison Table to compare the options open to you.
IVA (Individual Voluntary Arrangement)
An IVA (Individual Voluntary Arrangement) reduces your debt payments to an affordable level. It lasts for a fixed period (normally 5-6 years).
After you have completed the Arrangement any outstanding debt is written off. If you are a home owner it can be an ideal solution as it gives your property legal protection. However you may be obliged to release equity.
IVA payments are not fixed. Where your circumstances improve during the arrangement your payments may also increase. If you are unable to maintain them the Arrangement could fail.
If you live in Scotland an IVA is not available to you. You may be able to consider a Trust Deed instead.
Bankruptcy and Debt Relief Order (DRO)
Despite what you may think for many people Bankruptcy can be the best debt solution. This is often the case if you are living in rented property (or own a house which is in negative equity) and do not own an expensive car.
Once you are bankrupt all your unsecured debt is taken away. You only have to make further payments if you can afford to do so. You are bankrupt for just 12 months.
Your credit rating is negatively affected for 6 years. However this is the same length of time as if you were to use an IVA.
If you have debts of less than £20,000, are renting and have little or no disposable income you might qualify for a Debt Relief Order. This provides the same outcome as bankruptcy but costs far less to implement.
The Administration Order is probably the least used debt solution. This is partly due to the fact that it is only available if your debt is less than £5000. Also a County Court Judgment (CCJ) must already have been issued against you.
Unlike solutions such as Bankruptcy and a DRO you still need to be able to make a payment towards your debt each month. This is normally made for three years after which any outstanding debt is written off.
Given the requirement to make payments people who consider using an Administration Order normally end up choosing a Debt Relief Order.
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