Facing a debt crisis can feel like the end of the world. With money tight, making ends meet can seem hard enough without having to juggle your finances and with debt consolidation loans and credit cards among the ideas people might consider, choosing the right option to tackle your problems can be a minefield in itself. However, with the right debt management advice you can find solutions leading to a free debt settlement and financial stability.

When faced with mounting debt problems there are basically four options available for dealing with it for dealing with it:

1.    Debt consolidation

Debt consolidation is the borrowing more money in order to repay your existing debts. The positive point for this option is that the repayments of this new loan will be less than the existing repayments allowing you to reorganise your expenses and bring your finances back to stability.
However debt consolidation often comes at a heavy price! Lower repayments of the new loan over a longer have to be weighed up with the understanding exactly how much you will be paying back in the end – the total amount of the repayments.

Advantages

• Reduces the monthly total amount you pay on debt repayment.
• Maintain your credit rating.

Disadvantages

• Normally greatly increases the time it takes to repay your debts.
• Usually advertised only to homeowners.

2.    Debt management plan

Any business, bank or company which is owed arrears by a consumer is able to seek a judgment in the county court to reclaim their money. The court will allow that you must firstly pay your “priority” debts which are those debts which could lead to the loss of home, utilities, essential items or those items such as council tax which could theoretically lead to imprisonment. Also allowable are payments to maintain your family such as housekeeping, clothing etc. The remaining amount will be used by the court as a guide for repayments to your bank, credit card and other non-priority debts. However the banks and card companies will sometimes respond more positively if one of the debt assistance companies writes on your behalf.

Advantages

• Normalises your income and expenditure without taking on more debt.
• If you wish it can be done by yourself.

Disadvantages

• No guarantee that your creditors will accept the reduced payments option.
• The repayment period will increase.
• Your credit rating could be affected

3.    Individual Voluntary Arrangements

An “Insolvency Practitioner” will draw up a proposal on how you will repay the full amount of your debt. These payments can be over a period of time, maybe up to 5 years, or as a lump sum. The creditors agree to write off any outstanding debts once the agreed payments have been made. The calculated payment amount is usually referenced against what would be recovered should you made bankrupt and the Insolvency Practitioner costs are usually written into the agreement

Advantages

• Allows affordable repayments over a reduced timeframe.
• Offers the advantages of bankruptcy without its restrictions.

Disadvantages

• Costs can be excessive.
• You may have to pay a start-up fee.
• Payment defaulting may lead to bankruptcy
• Your credit reference files will contain details of payment default.

4.    Bankruptcy

This option can be started by either whoever owes money or by the company(s) waiting for missed payments. Financial companies such as banks will normally only consider this option if they see it as financially worth their while. This does not mean that they would not threaten to use this option in which case you should urgently take advice from either your Citizens Advice Bureau or other independent agencies. Once bankrupt a bankruptcy trustee will arrange to sell your valuable items (including you house if you are the owner) and will discuss what regular payments can be made. The trustee also has the power to examine your financial history especially prior assets which were given away or sold prior to the bankruptcy. These days those who are bankrupt for the first time can expect to be discharged after one year after which you may be required to make regular payments for up to three years.

Advantages

• Limits the repayment period.
• Gives legal protection regarding your debts.

Disadvantages

• You are under the control of the courts.
• You stand to lose assets other than those required to live.
• Utility contracts will have to with another adult living at the address.
• You are unable to hold various public offices until the bankruptcy is discharged. This also goes for directorships of limited companies.
• Credit access will be severely restricted until discharged and then higher rates will prevail until your rating slowly recovers
• Some debts are not included in the bankruptcy such as mortgages, court fines etc.
• Any finding of dishonesty can give restrictions on your bankruptcy discharge.
• It will cost you £475 for the petition for bankruptcy.

There is no correct method of tackling your debt problem only various options as detailed above so please seek creditable advice where available.