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While Britain has achieved a record low unemployment rate of 5.1%, this is in no way synonymous with financial security and stability. Due to the combination of high living costs and practically non-existent wage growth, the average Briton is, in fact, straining to pay his bills at the end of the month.

Struggling to make ends meet, many have found themselves borrowing money to survive. They are stuck in a habitual trap from which they cannot break free, accumulating a debt that they can’t possibly pay off, and getting trapped further and further in a downward spiral of indebtedness.

What makes this already bleak and hopeless situation even worse for some people is a lack of awareness and understanding of debt and debt management. They find themselves awash in a sea of debt, often clueless about what to do and how to deal with their financial situation. And all the myths and misconceptions surrounding debt and insolvency procedures make it even harder for the affected to educate themselves and ask people the right questions to get the right answers.

So here is a quick rundown of what to do and what not to do should you find yourself stuck in a debt trap.

Burying your head in the sand

Ignoring notices from your creditors might look like an appealing solution, but in fact, all you’re doing is adding fuel to the fire.

Shakespeare might have you believe that “thinking makes it so”. That, however, is far from the truth. It doesn’t matter how hard you try to wish your problems away and ignore your debt. All that wishing won’t make your financial troubles disappear. In fact, by closing your eyes and ears and not paying attention to the warning bells, you might actually do yourself more harm than good.

So get your head out of the sand, stop running from your problems, and face them head on!

Borrowing from A to pay off B

This seems like an easy way out of all the troubles. B’s debt is paid off, B is happy, B won’t trouble you in the future, so problem solved.

True. Until A starts knocking on your door that is.

This concept might seem like an ideal way to buy time until you have come up with a better way out, but this is definitely not a viable long-term solution.

Real debt management options

Once you have acknowledged your debt and decided to tackle it head-on, there are a few options available to you. The most commonly used ones are Debt Management Plans (DMPs), Individual Voluntary Arrangements (IVAs), and bankruptcy.

  1. Debt Management Plans (DMPs)

A DMP is a non-legal and informal agreement between the debtor and the creditors, and it is a method used largely to pay back ‘non-priority debts’ (e.g. credit cards, loans, and store cards).

With the help of a so-called DMP provider, you and the creditors settle upon a monthly payment, which will then be divided among all creditors.

As with many other debt management options, there are a number of advantages and disadvantages that require consideration when thinking about DMPs. One of the biggest differences from other solutions is that there is no write-off. So the payment to the creditors continues until the entire debt is fully paid off.

On the other hand, however, DMPs offer you a greater sense of flexibility as you are not bound to a minimum repayment period. Additionally, you always have the option of cancelling the DMP whenever you please.

But this level of flexibility works both ways. For example, creditors are in no way required to cooperate. Hence, they might choose not to agree to the DMP arrangements in the first place. And if they do decide to go ahead, they can always change the terms of the agreement and demand higher payments midway through. As the DMP is a non-legally binding option, they might also decide to take further legal action against you at any given time.

  1. Individual Voluntary Arrangement (IVAs)

IVAs, unlike DMPs, are legally binding agreements between the debtors and the creditors. This is an option most often utilised in connection with an unsecured debt of over 6,000 owed to more than two creditors.

In the past, IVAs have gained in popularity with both debtors and creditors. In 2013, 48% of all individual insolvencies consisted of IVAs and the first quarter of 2016 saw 9,916 IVAs being registered in the UK. And this growth in popularity is not least due to its many benefits.

One of the key advantages to be considered is that IVAs have a write-off option. Similar to DMPs, the parties involved will settle on a monthly payment that will be distributed among the creditors. But, unlike DMPS, the IVA is considered completed and the remaining debt is forgiven after a set period of time, usually between five to six years.

IVAs also offer the debtors a higher level of stability and security, as creditors cannot get around the terms of the agreement and take legal action without the court’s consent. Another thing that will never happen is that you will lose everything and end up homeless on the streets. This tends to be a big fear when talking about debt, but with IVAs, you have the guarantee that your assets (the family home and car) will usually remain untouched.

On top of all this, debtors also appreciate the discretion that comes with IVAs, as one has to go through several channels (such as the IVA database) to find out about someone else’s past or existing IVA.

On the downside, however, it is important to note that this option is less flexible than for instance DMPs. IVAs demand much more dedication, as you cannot change the terms of the agreement once they have been agreed upon.

  1. Bankruptcy

Although it has become something of a common phenomenon these days and even though it might appear somewhat glamorous with celebrities favoring this option (after all, if Toni Braxton and Marvin Gaye do it, why shouldn’t you?) bankruptcy really should be your very last resort. In fact, it should only be considered if filing for bankruptcy is the only way to get in the black.

While this option offers legal protection from the creditors and instantly releases you from all your debt, it doesn’t come without its price. In order to repay some of the money, you will be forced to sell all valuable assets, such as your house, cars, and business. So although you could end up paying back less than you would with an IVA, the damage was done both to your livelihood and your credit rating will be more severe.
Also, bankruptcies tend to be less discreet than other forms of debt management. Bankruptcies are, for instance, still advertised in the London Gazette. They might also affect your career prospects greatly as you might not be able to start, promote, or run a business of your own in the future.

As this is undeniably the most aggressive form of debt management, it is advisable to seek professional advice before settling on bankruptcy. Sometimes before you can file for bankruptcy, your creditors might hire debt collection agencies (they can try these guys out for instance) who can help them recover the amount you owe them. These companies can help you as well, by coming up with various strategies with respect to your situation that can help you formulate a plan to get out of the debt. Most of the time, there are ways you can find to repay your loan, which is why bankruptcy should really be considered as a last resort.

In fact, as each individual’s situation is different, it is also advisable to get professional advice from an experienced Insolvency practitioner who will be able to find the right solution for your problem.

About the author:

Yaakov Smith is an entrepreneur who is passionate about providing creative solutions to everyday business issues. He is the owner and founding manager of Logican Solutions Ltd, which offers a range of industry specific products, including claims management, debt management and property portfolio management.

Andy McGowan
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